The immediate threat of a no-deal Brexit has receded, for now at least, and that’s given the Barclays (LSE: BARC) share price a boost — since a recent low in August, the shares are up 24%. To put that into perspective though, we are still looking at a 40% price fall since it hit a high in summer 2015, a year before the fateful EU referendum.
The UK’s status as Europe’s banking centre is obviously history now, but the casting of the banking sector as an untouchable pariah is surely overdone. Barclays is actually quite nicely profitable, has a couple of years of earnings growth forecast, and its dividends have come bouncing back.
Double
So could Barclays double your money for you? A dividend-paying stock, provided it can keep the annual payments going, is pretty much guaranteed to do that if you keep it for long enough, but the real question is, how long?
Barclays is currently predicted to deliver a 5.6% yield in 2020, which would be covered around 2.5 times by forecast earnings. That looks like very healthy cover to me and suggests the dividend is sustainable, so let’s assume it’s kept going at the current level over the long term.
An annual return of 5.6%, with dividends reinvested in more Barclays shares, would turn an investment of £1,000 into £2,031 in 13 years — and that’s assuming no share price gains and no more dividend raises.
Price rise
If the share price rises in line with inflation, say at 2% per year, and earnings and dividends keep pace, that 13 years needed to double your investment would drop to 10 years — resulting in a final value of £2,080 from your initial £1,000 investment.
I think that would be a pretty decent investment return, doubling your money every 10 years. It’s way more than anything a Cash ISA is likely to bring you, as current rates of around 1.5% interest would take 50 years to achieve the same — and it would be beaten by inflation anyway, so you’d lose money in real terms.
But this is assuming the next decade is one of continued negativity towards the banking sector, with the Brexit saga never concluding and the uncertainties going on and on. That’s keeping the Barclays share price valuation low, on a 2020 P/E based on current forecasts of only 7.2, which is around half the FTSE 100‘s long-term average.
Re-rating?
Obviously that’s not going to happen, and we’ll almost certainly see a resolution to Brexit uncertainties within the next few months. Providing we don’t crash back to facing a no-deal expulsion, I reckon that will bring about a re-rating of banking stocks.
Back at that pre-referendum peak, Barclays shares were on a P/E of 17 (based on that year’s earnings), though I don’t see them pushing back to that level any time soon — but something approaching the Footsie’s average could be on the cards.
Even with the share priced elevated to a modest P/E of 10, that would imply a 38% share price hike on top of my previous calculations, and an investment today of £1,000 could grow to £2,000 in a little over five years.
Now, these are just speculative estimates, but I do think it suggests that Barclays shares are a good investment now.
