Barclays (LSE:BARC) shares are among the top performers on the FTSE 100 over the past 12 months. It appears the negative sentiment surrounding the British bank has finally subsided, and things are improving.
Shares in Barclays are up 28.5% over the past 12 months. So if I’d put £1,000 in the banking stock a year ago, today I’d have £1,285, plus dividends. The dividend yield’s currently around 4.2%, but a year ago it was around 5% — this is because share prices and dividend yields work in opposite directions.
All in all, my £1,000 investment would be worth around £1,335. I actually doubled up on Barclays stock when the price collapsed on the back of the Silicon Valley Bank fiasco. It didn’t pay off for a long while, but now it’s looking like a very good call.
Sentiment swings
Barclays has been undervalued for some time, likely due to lingering investor caution about UK banks since the financial crisis. Despite Barclays returning a profit in each of the last 15 years, this negativity didn’t fade… perhaps until now.
There could be several reasons for this. Banks have weathered the negative impacts of high interest rates and slow economic growth pretty well, and now things are looking up. Net interest income is elevated, and interest rates are set to settle in the so-called Goldilocks Zone in the medium term.
This is when interest rates are elevated — say 2.5-3.5% — but aren’t high enough to engender a slew of customer and business defaults. This also allows banks to benefit from their hedges. In fact, Barclays’s gross hedge income could be worth £6bn in 2025 alone — three times higher than 2022.
Another reason for the sentiment change relates to the company’s strategic overhaul. The British bank’s three-year plan to support its share price involves a £10bn buyback programme and a £2bn cost-reduction plan.
Still a value stock
Barclays isn’t expensive compared to its international peers. The stock trades at 6.9 times forward earnings. That’s incredibly inexpensive compared to US peers including JP Morgan at 12.4 times and Bank of America at 11.8 times.
Barclays is broadly in line UK peers — they’re all pretty cheap. It’s price-to-earnings ratio is expected to fall to around 5.3 times in 2025 as earnings pick up further. It’s also trading at 0.55 times tangible book value — another suggestion that the company is undervalued.
Understandably, we now seeing analysts pointing investors in the direction of UK and European stock as the American market gets overcrowded.
I appreciate Barclays hasn’t had the best reputation with regulators in recent years, and its return on investment has lagged. This does represent something of a risk. But it’s good to see the company doing something positive to boost performance.
Management said it would allocate an additional £30bn of risk-weighted assets to its UK retail banking arm in the coming years as it looks to fund the most successful parts of its business. It’s sensible and hopefully will work.
Barclays is up, and I think it can go much further.
