Wow! Aren’t Barclays (LSE: BARC) shares cheap! The FTSE 100 bank is now trading at just 5.19 times earnings, one of the lowest valuations on the index.
I love picking up undervalued stocks at bargain prices, then sitting back and waiting for them to get their bounce back. As a private investor, this is the biggest edge we have over the pros. We can afford to give unloved stocks time to recover.
This bank is a recovery play
We don’t have to deliver reports to anxious investors, explaining how much money we have made over the last quarter, or year. Instead, we can buy stocks with a five- or 10-year view, giving them time to flourish.
In the interim, we can steadily reinvest our dividends to pick up more stock. And the only ones we have to answer to is ourselves. This reduces the dangers involved in buying a stock when it’s thrillingly cheap, like Barclays is today.
The price-to-book ratio is now a meagre 0.4 (where a figure of 1 equals fair value). It’s even cheaper than FTSE 100 rival Lloyds Banking Group, which trades at 6.6 times earnings (still cheap) and has a PB ratio of 0.7.
Barclays took a bit of a beating in March, when investors feared it might get swept up in the global banking crisis. In contrast to Lloyds and NatWest Group, it clung onto its US investment banking arm after the financial crisis, and investors decided this made it vulnerable to contagion. So far, it has escaped.
The danger lingers as the $100m meltdown of First Republic Bank in the US shows the banking crisis isn’t done yet. The Bank of England has worked hard to build up capital strength and other safeguards. Investors can only hope it holds.
Still dangers out there
While banking crisis risks are priced into Barclay’s low valuation, that will be little consolation if its shares go into full meltdown mode.
The share price is down 25% over the last five years but has edged up 12.58% over the last month. Over a year, it’s up 9.28%.
The attraction for a long-term buy-and-hold investor like me is that Barclays shares are starting from a low base. They could deliver a lot more capital growth over the next five years than the last five. As ever, there’s no guarantee of that.
Annual profits fell 14% last year, but that doesn’t worry me too much, as it reflected one-off US regulatory penalties. Barclays still posted a £7bn pre-tax profit, treated investors to a £500m share buyback, and lifted the dividend almost 21% to 7.25p per share.
The forecast yield is 5.3%, covered a comfortable 3.7 times by earnings. Dividends are never guaranteed and Barclays’ has been choppy. It was 6.5p in 2018 but fell to 3p and 1p the following years (the pandemic was largely to blame).
Operating margins are forecast to climb from 28.1% to 45.3%, which looks promising. So yes, I’d buy Barclays shares in May if I didn’t already hold Lloyds stock. Then I’d cross my fingers and hope the banking crisis doesn’t explode back into life.
