Barclays (LSE: BARC) shareholders have suffered a painful 2018, seeing their shares fall by 16.5% so far. And over five years, the loss comes in at a shade under 40%.
That’s the worst five-year performance of the FTSE 100 banks, falling behind even Lloyds Banking Group and Royal Bank of Scotland, both of which needed government bailouts. So why is Barclays still so badly out of favour? After all, the liquidity of the banks has improved dramatically under new legislation, and they’ve been coming through Bank of England stress tests with impressive results.
My Foolish colleague Kevin Godbold reckons that looking at specific financial crash woes is missing the big picture, and that’s the long-term cyclical nature of banking. He also suggests that, as the banks just take a small slice off the success of the economy, they could be badly squeezed next time there’s a recession.
I think he has a point, and I also reckon there’s a problem here that we’ve seen in all sorts of other situations regarding shares. It happens after a high-flying sector or company suffers a serious downturn, and future observers have a habit of unrealistically comparing back to the good old days.
Clean slate
But it’s no good comparing the bank with the Barclays of old, as that simply does not exist any more. And pre-crash earnings, share prices and dividends are no more relevant to today’s Barclays than, say, the price of sausages. The sector that was largely seen as an unassailable cash cow effectively went bust, and it’s possible that Barclays shares are currently fairly valued in terms of their genuine long-term profitability and their newly-understood risks.
But having said all of that, another regular response by burnt investors is to steer completely clear of the businesses that failed them, often for ever. And I reckon that can lead to long periods of undervaluation, before new investors are able to put the bad things behind them and evaluate the shares without that historical baggage.
Another fellow Fool writer, Harvey Jones, is a lot more bullish on Barclays, and he’s essentially pointing to the valuation of the shares.
We must remain mindful of the obstacles that might still face Barclays, including possible further penalties for its part in various misbehaviours — like, for example, the Serious Fraud Office’s investigation into the Qatari investments that saved the bank from having to seek government aid.
Depressed valuation
But current forecasts put Barclays shares on a forward P/E multiple of only 8.4. And if the predicted EPS rise for 2019 comes off, that would drop to 7.6. It would also provide a 2019 PEG ratio of 0.8, which is a growth indicator that investors in small-cap start-ups would like — for a major FTSE 100 company, it seems unusually attractive, to say the least.
Other measures are important for banks too, and Harvey points to a price-to-book value of just 0.4. So the shares are trading at less than half the book value of the bank’s assets. Again, that looks silly cheap to me.
Is there risk in the dividend? Yes, but the attractive forecast yields of 3.7% this year and 4.7% next would be covered 3.2 times and 2.8 times by earnings respectively. It would take a big hit to make that unsustainable.
I can only see Barclays shares are seriously undervalued, even with the cyclical risks.
