Barclays (LSE: BARC) shares have fallen recently and as a result they offer a high yield right now. With analysts expecting the banking giant to pay out 8.9p per share in dividends for 2023, the yield here is currently just under 6%.
Is the stock worth buying in light of this elevated yield? Let’s discuss.
Undervalued?
From a valuation perspective, Barclays does look quite interesting at the moment, in my view.
This year, the bank is expected to generate earnings per share of 32.6p. So at today’s share price of 152p, the forward-looking price-to-earnings (P/E) ratio is just 4.7. That’s an extremely low multiple.
To put that figure in context, HSBC currently has a P/E ratio of about 6.5. Meanwhile, US rivals JP Morgan and Morgan Stanley have P/E ratios of around 10 and 12.1 respectively.
Meanwhile, Barclays shares currently have a price-to-book value of around 0.35. That’s also very low. Generally speaking, a ratio under one signals that there’s value on offer.
So these figures indicate that Barclays shares could be undervalued right now.
It’s worth noting that the average analyst price target for Barclays shares is currently around 240p. So clearly the analyst community expects the share price to rise from current levels.
What are the risks?
Having said all that, Barclays does face some challenges right now. But I don’t see the company experiencing a Silicon Valley Bank-like crisis.
Most analysts agree that European banks are fundamentally sound and are unlikely to face liquidity issues in the short term.
European banks are fundamentally resilient, exceptionally cheap and face limited persistent headwinds.
Berenberg
But there are a few other issues that could present near-term challenges.
One is economic conditions. In the US (where Barclays has a lot of exposure), bond yields are pointing to significant slowdown in economic growth. This could have ramifications for the bank. For example, bad debt may surge, hitting its profits.
Another potential challenge is tighter regulation. After the collapse of Silicon Valley Bank, we may see more restrictive rules for banks in terms of liquidity. This could also hit profits. Barclays’ own analysts estimate that the banking sector could potentially be hit with an 18% pre-tax profit cut, due to increased regulation.
A third issue is that deposit costs (the rates banks pay to savers) across the sector have spiked, due to the sharp rise in interest rates. This is prompting analysts to mark down projections for net interest income.
So, ultimately, there is a lot that could potentially go wrong here.
Still, I think the shares offer some value at present. For those who like value and dividends, I think they could be worth buying at current levels.
That said, they wouldn’t be the first shares I’d buy today. Right now, there are plenty of other stocks that strike me as more attractive (than have a better risk/reward profile) than Barclays.
