If I’d been asked a year ago to name two bargains among UK banking stocks, I’d have responded with Lloyds Banking Group (LSE: LLOY) and Barclays (LSE: BARC) shares.
However, buying Lloyds shares and Barclays stock a year ago wouldn’t have made me much in the way of returns. Indeed, I’d have been much better off investing in a US S&P 500 tracker — up around 15% in 12 months (including cash dividends).
Barclays shares bump along
The Blue Eagle bank would have been the better investment of the two. Barclays stock is up 6.2% over the past year. Over the same period, the FTSE 100 index gained 6.3%, so they are neck and neck (all figures excluding dividends)
Over five years, the picture looks worse for the 333-year-old bank’s stock. Barclays shares have declined 6.8% over a half-decade. The FTSE 100 is up 6.6% over the same timeframe.
Of course, financial stocks plummeted during the Covid-19 crisis of 2020/21, before rebounding. Indeed, the bank’s share price hit a 52-week high of 198.86p on 8 March 2023. Then a US banking crisis sent financial shares slumping, with Barclays bottoming out at 128.12p on 20 March.
As I write, the share price stands at 153.72p, valuing this business at £23.5bn.
For the record, my wife and I bought Barclays for our family portfolio at 154.5p a share in July 2022. Thus, we are sitting on a tiny paper loss (-0.5%) today. However, we bought this stock primarily for its outstanding ability to produce future dividends.
Trading on a multiple of just 4.5 times earnings, Barclays has an earnings yield of 22.4%. This means that the dividend yield of almost 5% a year is covered 4.5 times by earnings. This huge margin of safety is one of the widest in the FTSE 100. Now for Lloyds…
Lloyds stock lags behind
Lloyds stock has been a loser over the last year, dropping 0.4%. It’s also lost 27.2% of its value over the past five years. Furthermore, being a Lloyds shareholder has been a thankless task for at least a decade.
That said, we are also Lloyds’ stockholders, having paid 43.5p a share in June 2022. With the share price currently at 42.36p, this investment has also been a damp squib (down 2.6%). Then again, like Barclays, we bought Lloyds shares for their future dividends.
Right now, this stock trades on an earnings multiple of 5.8, for an earnings yield of 17.3%. This means that the dividend yield of close to 6% a year is covered a healthy 2.9 times by earnings. So what’s not to like? Why are both stocks in the doldrums?
Bad times for British banks
I suspect that these popular and widely held stocks have done poorly in 2022/23 because the UK economy is under increasing strain. Rising interest rates make mortgages, loans, and other credit much more expensive to service. Also, elevated inflation and hefty energy bills have hit disposable incomes.
In addition, banks’ loan growth has been slowing this year, which will hit future earnings. And with a recession possibly looming, some investors prefer to steer clear of shares in major banks.
Despite these concerns, I still see Lloyds and Barclays shares as long-term winners as and when the UK economy strengthens. So we will hold on tight to both!
