At first glance the Barclays (LSE: BARC) share price looks like an absolute bargain. I’d love to add the stock to my portfolio of FTSE 100 shares but first I have to address one key question. Why so cheap?
I love buying FTSE 100 shares after they’ve fallen sharply, especially if there’s a juicy dividend attached. Barclays ticks both boxes. The danger is that it could be a value trap. This is where the share price never recovers, and the dividend slowly dries up.
Is it too cheap?
Measured by its price-to-earnings (P/E) ratio of just 4.7, Barclays is a stone cold buy, I feel. A figure of 15 is seen as fair value. It’s even cheaper measured by its price-to-book value, which compares the value of a stock to the company’s underlying assets. Today, it stands at just 0.3, where a figure of one is seen as ideal.
The reason Barclays shares are so cheap is that they keep falling. They’ve dropped 17.66% in five years. Over 12 months, they’re down 10.75%. The last month has been particularly harsh, with the stock down 11.82%.
This year’s banking crisis hit Barclays harder than other FTSE 100 peers as investors decided it was more exposed to contagion due to its investment banking operations. Yet nothing came of that (or looked likely to do so, if you ask me). Its balance sheet looks solid with a strong common equity tier 1 (CET1) capital ratio of 13.9%.
Last month, Barclays posted first-half pre-tax profits of £4.5bn, up 22% year-on-year. It also announced a £750m share buyback, higher than the recently completed £500m plan.
Barclays also benefited from rising interest rates, with net interest margins jumping from 2.67% to 3.2%. That didn’t help the share price though, as investors fixated on the negatives instead.
Higher interest rates are hurting the bank’s retail and business customers, and Barclays lifted its bad loans provisions from £341m to £900m in preparation. Like all the big banks, it has also come under political, regulatory and activist attack for failing to pass on rising interest rates to loyal savers. Rectifying that would squeeze margins.
It looks good value to me
Its investment banking arm is struggling as trading in bonds and shares falls, with income down 22% to £3.2bn in the second quarter. I’m not naive, Barclays has some issues here. This is a challenging time for the UK economy. Many potential Barclays investors are lying low for now. They’ll be back, in time.
The plunging share price has boosted the relative value of its dividend. It’s now on course to yield 6.2% this year, covered 3.7 times by earnings. In 2024, the yield is forecast to hit 7.04%.
In 2022, the bank’s total capital distributions were equivalent to 13.4p per share, once buybacks were included. I’m hoping for similar (or better) in 2023.
I think we’ll have to wait for the economic mood to lighten before the shares get their mojo back. I’m in no rush. I can reinvest my dividends at today’s low valuation while I wait for the Barclays share price to head in the right direction again. I think it should come good, given time.
