The stock market doesn’t have a half-price sale in January. But Barclays (LSE: BARC) shares sure make it look like it does to me.
They’re a bit below break-even in the past five years. But since a recent peak in early 2022, the share price has fallen more than 30%.
Earnings and dividends
At a time when the bank’s profit outlook was bleak, and the dividend was under pressure, it might make sense. But that’s not the case.
Earnings look flat this year. But forecasts show rises for the next two years. And the mooted earnings would be enough to cover the dividends more than three times over.
Talking about dividends, the forecast yield for 2023 is 5.3%. And again, it looks set to rise. It could top 7% by 2025, if the analysts are right.
Super low value
Does this sound like a stock that deserves to be valued at only around a third of the long-term average for FTSE 100 stocks?
Looking at the price-to-earnings (P/E) ratio, the index has been up around 15 on average. Right now, with today’s inflation and interest rates, it’s down about 11.
That means that, if we buy a mixed bag of Footsie shares, on average it should take about 11 years for the companies to earn back the prices we paid.
What about Barclays? Well, its P/E is down at only five. And dropping further based on forecasts.
Half-price
Do I really believe the stock is priced at only half its true valuation? And that every 50p invested in Barclays now could soon turn into £1?
On the basis of the P/E, I think it might indeed be that cheap.
Barclays shares look extra cheap on another measure too. The stock’s price-to-book ratio is down at 0.4, and dropping even lower on forecasts.
It means a share now costs less than half the value of the assets it represents.
Am I wrong?
Before I get too excited, I need to look at why I could be wrong. It’s all about base rates and bad debts.
High interest rates can boost a bank’s lending margins. But that’s no good if borrowers can’t afford to pay, and they default on their loans.
In the first nine months of the year, the bank has set aside impairments of £1.3bn to cover credit risk, and that’s a good bit of cash.
And it does seem like the City doesn’t expect Barclays to make good returns on its equity.
Screaming buy?
So there are good reasons why a bank like Barclays should be lowly valued right now. And, unlike the other UK high street banks, Barclays faces international investment banking risk too.
But I really do think today’s valuation is just too low. And when interest rates start to drop, we could see a big change.
I just hope the shares stay this cheap until I have my next bit of investment cash ready. Barclays is top of my want list for 2024.
