Is the Barclays share price dip a buying opportunity?

Barclays shares look very cheap right now. Here, Edward Sheldon looks at whether he should buy the banking stock for his portfolio.

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Scene depicting the City of London, home of the FTSE 100

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Key Points

  • Barclays shares have underperformed the FTSE 100 recently
  • The stock now looks very cheap
  • There are reasons to be bullish on Barclays but also major risks to be aware of

Barclays (LSE: BARC) shares have underperformed recently. While the FTSE 100 index has climbed more than 10% over the last 12 months, Barclays share price has fallen nearly 20%.

Has this share price weakness created a buying opportunity for me? Let’s take a look.

3 reasons to buy Barclays shares today

At present, there are a number of things to like about Barclays from an investment perspective, in my view. One is that the bank should benefit from rising interest rates around the world.

Banks generate a large proportion of their income from the spread between the interest rates they charge to lend money and the interest rates they offer to borrow money. When rates are higher, they have the ability to generate larger spreads.

This year, both the Bank of England and the US Federal Reserve have raised interest rates. And we can expect to see plenty more rate hikes throughout 2022. This is good news for Barclays. It’s worth noting that in the company’s recent full-year results, management said: “Barclays’ diversified income streams position the group well for the ongoing economic recovery and rising interest rates”.

Another reason to be bullish on Barclays is that the stock is dirt-cheap. At present, analysts expect the bank to generate earnings per share of 25.8p for 2022. That puts the stock on a forward-looking price-to-earnings (P/E) ratio of just 5.9 at the current share price. That’s a low valuation.

Additionally, Barclays shares look attractive from an income perspective. For 2022, analysts expect the bank to pay out 7.79p per share in dividends. This means that the yield is around 5% at the current share price. In today’s low-interest-rate environment, that’s a very attractive yield.

Risks to the share price

Having said all that, there are a few risks to be aware of here. One is the possibility of a UK or global recession.

With oil prices above $100 per barrel and inflation at sky-high levels, a lot of consumers are feeling the pinch right now. Meanwhile, the Russia-Ukraine crisis, and the uncertainty it’s creating, is impacting business spending.

As a result, many economists believe that we could see a recession in the not-too-distant future. A recession would not be good for Barclays, as bank stocks – which are ‘cyclical’ – tend to underperform when economic conditions are weak.

It’s worth noting here that earlier this week an unnamed investor offloaded nearly £1bn worth of Barclays shares (roughly a 3.6% stake) at a heavy discount to the previous day’s share price. I don’t know who this ‘whale’ investor was, but I’m willing to assume they know far more about Barclays shares than I do. I see the large share sale as bearish. It suggests the investor sees downside risk here.

Another risk to consider is the possibility that innovative FinTech companies could capture banking market share. Although this risk is more long term, I think it’s certainly something to keep an eye on. Technology is disrupting business models across a wide range of industries today. And banking won’t be immune.

Barclays shares: my move now

Weighing everything up, I won’t be buying Barclays shares for my portfolio today. For me, there’s too much uncertainty. All things considered, I think there are better stocks to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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