You’ll see a lot of articles extolling the virtues of Barclays (LSE: BARC), and the argument tends to go something like ‘Barclays is turning itself around, yet the shares look cheap, so I’d buy the shares.’
However, it has looked cheap for a long time, but the truth is that the shares are more than 50% lower than they were nine years ago. Indeed, September 2009 marked the top of Barclays’ bounce-back from the stock’s dip following the credit crunch last decade.
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For most of that period, people have been saying Barclays is recovering and it’s selling cheap. But if you’d bought the shares in September 2009 you’d have collected 46p in dividends and lost around 170p per share on the share price, for an overall loss close to 37%. At first glance, Barclays looks like it has been a value trap over the past nine years, but that’s only true if you believe it has been displaying indicators that suggest good value. I don’t.
What is good value?
With many trading companies, a low price-to-earnings (P/E) ratio, rising earnings, a high yield and a discount to net asset value would flag good value. But I think it’s different for the banks because they operate very cyclical businesses. That’s easy for me to say with the benefit of hindsight, but it first dawned on me during 2013 when I turned cautious on Barclays.
I think we need to read the valuation indicators backwards for the banks. High earnings and a low valuation could spell danger for shareholders because it could mean we are getting closer to a cyclical peak in earnings. Then, if earnings fall and the valuation looks higher, the indicators could be flagging better value.
Within the broad downtrend in the Barclays share price since 2009, we can see the phenomenon playing out. Earnings dipped in 2012 and the P/E rating shot up. The shares were down, but it was time to buy despite the higher P/E multiple because earnings recovered, the P/E declined again, and the share price rose around 95% over seven months. A similar thing happened in 2016 too.
Looking forward, City analysts continue to forecast advances in normalised earnings and the dividend is moving up too. Yesterday the firm confirmed its intention to pay a 2018 dividend of 6.5p, subject to regulatory approvals, which takes the payout back to where it was in 2015. But the stock market appears to be in no mood to raise its valuation of Barclays. The opposite is true, and the valuation continues to fall. Indeed, the recovery in the share price in 2016 failed to reach the recovery peak of 2013 and the downtrend looks intact.
I think the stock market sees ever greater danger in the recovery at Barclays because each advance takes the firm closer to its cyclical peak in earnings. So, the market keeps marking the valuation down. With Barclays today, I see a capped upside for shareholders with lots of downside, cyclical risk, so I think it is more of a value trap than an unmissable bargain.