A cheap FTSE 100 growth share I wouldn’t touch with a bargepole!

Barclays shares look like a brilliant bargain at current prices. But Royston Wild thinks there are better FTSE growth shares to buy for his portfolio today.

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The FTSE 100 is jam-packed with growth shares. Some even trade on rock-bottom price-to-earnings (P/E) multiples.

But this doesn’t mean I’d buy them all for my portfolio. Many, while looking cheap on paper, could end up costing investors like me a fortune in the long term.

Barclays (LSE:BARC) is one such stock I’m keen to avoid at all costs.

Economic stress

Barclays has a big advantage over UK high street rivals Lloyds and Natwest. Its significant exposure to the US gives it added growth opportunities, and reduces risk by eliminating any dependence on one territory.

But I’m still not buying. The company still generates vast profits from its home market. And this could compromise its ability to deliver healthy shareholder returns in the years ahead.

Britain’s economy continues to stagnate and increased just 0.1% in February. Markets celebrated signs that the UK could be heading straight out of recession. But it means the trend of weak economic growth drags on.

And it’s tough to see how the economy breaks out of this pattern. Massive structural problems like weak productivity, labour shortages, skills gaps, and Brexit turbulence will take years and tonnes of political action to solve.

NIM risk

Retail banks like Barclays could struggle to grow revenues in this climate. The task already looks like a challenging one given that the Bank of England is likely to slash interest rates soon. This will put net interest margins (NIM) across the sector in a tailspin.

NIMs measure the difference between the interest banks charge borrowers and pay savers, and is a key indicator of profitability. At Barclays, this rose to 3.13% in 2023 from 2.86% the year before thanks to interest rate hikes.

However, it slipped to 3.07% during the fourth quarter, and was down from 3.10% from a year earlier. It’s a metric that threatens to steadily worsen in the short-to-medium term.

Low valuation

City analysts expect Barclays to increase earnings 14% in 2024. What’s more, growth of above 20% is forecast for each of the following two years.

The bank is hoping that a restructuring drive to cut £2bn worth of costs will help profits. But the risks to these impressive forecasts are high. It’s why Barclays shares trade on a low P/E ratio of just 5.9 times.

Dividend boost

On a brighter note, I expect Barclays shares to retain their reputation as a solid passive income provider.

This is thanks in large part to the bank’s strong balance sheet: its CET1 capital ratio (a measure of solvency) stood at 13.8% at the end of 2023.

I’m also optimistic because predicted dividends are covered between 3.5 times and 3.9 times by expected earnings over the next two years. These figures provide a wide margin of safety should profits be blown off course.

But Barclays’ decent dividend yields of 4.8% and 5.3% for 2024 and 2025 aren’t enough to encourage me to invest.

For me, the prospect of sustained share price weakness makes it an unappealing FTSE share to buy. Right now I’d rather spend my money on other cheap passive income shares.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group 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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