The FTSE 100‘s been doing well this year. The UK index is up 5% since the beginning of January, roughly keeping pace with its US counterpart the S&P 500.
One of the best-performing UK stocks of 2024 has been Barclays (LSE:BARC), which is up just over 30%. Despite this, I still think the stock looks cheap at today’s prices.
Why has the stock been rising?
Barclays has a unique structure among UK banks. Unlike Lloyds and NatWest, it combines a large retail business with a significant investment banking division.
Balancing these franchises has proved a challenge. But a couple of months ago, the company announced radical plans to restructure its operations, involving a 20% reduction in the workforce.
The bank also announced its intention to maintain its current dividend while spending £10bn on share buybacks. Even at today’s prices, that’s around a third of the outstanding share count.
The prospect of a more efficient banking operation and significant shareholder returns has gone down well with investors. And the stock’s been rising as a result.
A missed opportunity?
It’s easy to think that a 30% increase in the price means the moment to buy Barclays shares has passed. This line of thinking’s dangerous though, and investors don’t have to think too far back to see why.
During the first four months of 2023, Rolls-Royce shares gained around 63%. But anyone who decided this meant the opportunity to buy the stock had gone, missed out on a further 168% rise.
Buying shares in a company at a lower price is clearly better than buying them when they’re more expensive. Investors though, should think carefully about when a stock’s become too expensive.
What determines this is how much cash the underlying business can generate for its shareholders. And even after a 30% rally this year, I still think Barclays shares look like a bargain.
Shareholder returns
The only thing that’s certain when a company restructures its operations is that it’ll incur costs. That makes Barclays shares risky, but I still think the stock looks like a bargain.
Right now, a 10-year government bond comes with a 4.37% yield. So the question is whether or not Barclays shares can offer a better return than this – and I think they can.
To start with, the stock currently has a dividend yield of 3.94% and the company’s said it intends to maintain this. That goes a long way towards matching the bond.
From there, it doesn’t take much for the share buyback programme and the savings made through restructuring to generate a higher return. And this should be attractive for investors.
The UK’s best bank stock?
Barclays might emerge from its transition in a position to use its diverse operations as a strength, rather than a weakness. If it does this, it could have a genuine advantage over its peers.
Even if it doesn’t though, there are still significant shareholder returns on offer from the dividend and the share repurchases. The stock might be up 30% this year, but I still think it’s good value.
