This is a value stock I don’t want to miss, with a 5% payout

Sumayya Mansoor explains why this banking giant falls into the value stock territory and could be a great opportunity.

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A banking giant that I believe falls into the value stock category right now is Barclays (LSE: BARC). Here’s why I like the look of the shares.

Banking shares tumble

Due to recent macroeconomic events, many banking stocks have dropped. Soaring inflation, a cost-of-living crisis, and rising interest rates have hampered global markets. Many believe that a banking stock’s fate is linked with the economic outlook — which right now is quite bleak.

I’m looking past the current issues, which I believe are shorter-term issues, towards the longer-term picture. This is part of my investment strategy whenever I buy shares for my holdings. There are plenty of banking stocks in the value stock category but I’m going to focus on Barclays right now.

As I write, Barclays shares are trading for 144p. At this time last year, they were trading for 177p, which is a 15% drop over a 12-month period. The shares have fallen by 23% since February, when they were trading for 189p.

The bull and bear case

To start with, Barclays’ valuation is what stood out to me initially for me to consider it as a value stock opportunity. The shares trade on a price-to-earnings ratio of just five right now. Furthermore, the price-to-book ratio is just under 0.5. A figure under one usually indicates the shares are undervalued. There is a chance that further economic issues could see the shares fall further.

Next, Barclays share would boost my passive income with a dividend yield of over 5% right now. This is higher than the FTSE 100 average. However, I am aware that dividends are never guaranteed.

Finally, Barclays does have diverse operations, which can boost earnings and returns. It possesses a credit card, Barclaycard, as well as its retail presence and investment arm too. Diversification is helpful during tough times, as one area’s strength may offset another’s weakness.

Moving on to the bear case, Barclays has encountered some operational issues in recent times. This is never good news as it can impact levels of performance and investor sentiment.

Next, Barclays investment arm is closely linked to the US investment market, which has been shaky for some time now. This could result in its investment arm’s performance being adversely affected and returns and sentiment being negatively impacted too.

Generally speaking, Barclays, and all other banks, may benefit from rising interest rates in the short term as net interest income rises. On the other side of the coin, rising interest rates could see loan and mortgage default numbers increase as wage growth has slowed down. This is a key risk I will keep an eye on.

A value stock opportunity

To conclude, I like the look of Barclays shares. If I had the spare cash to invest, I would buy some for my holdings.

I believe Barclays shares’ fortunes will turn around when the world economy and its fortunes turn around too, although there is no guarantee of this. I am expecting some short-term pain, but with a long-term investing approach, I’m expecting to see earnings growth and increased returns as well as share price growth. At its current valuation, Barclays is a value stock I don’t want to miss.

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 assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc. 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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