In some instances, a value stock can be simple to find. One way I’ve done this previously is to identify a cheap valuation, and more importantly, a ground-breaking product or service with great future prospects.
However, not all stocks fit this bracket. With that in mind, one established business that I reckon falls into the value category is Barclays (LSE: BARC).
Here’s why I’d be willing to buy some of its shares when I next can, to bolster my holdings.
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On a good run
As one of the so-called ‘big four’ banks in the UK, the business doesn’t really need an introduction.
The financial services sector as a whole has experienced mixed fortunes in the past 18 months or so. Rising inflation and higher interest rates have presented a double-edged sword if ever I’ve seen one. The potential to make more money through higher rates is great, and Barclays has capitalised. However, the risk of defaults and credit impairments is also heightened, which could hurt earnings and returns.
Over a 12-month period, the shares are up 33% from 153p at this time last year, to current levels of 205p.
Value stock or value trap?
It must be noted that the FTSE 100 has been edging upwards in recent months, and this will have helped stocks like Barclays also rise. Inflation has come down, and murmurings of interest rate cuts have boosted investor confidence.
It’s worth noting that inflation could still rise, and there’s no guarantee that the Bank of England (BoE) will cut rates. Plus, we have a general election to manoeuvre very soon, which could have an impact on investor sentiment towards banks and other stocks too. I’ll keep an eye on these risks.
From a valuation perspective, Barclays shares look like a steal to me on a price-to-earnings ratio of close to 9. This is expected to drop close to 5 in the next fiscal year if forecasts come to fruition. However, I do understand there’s no guarantee of this, and things could change. It’s worth noting that the FTSE 100 average P/E ratio is close to 12.
Next, the business has been undergoing some transition. A big part of this is cost-cutting and efficiencies, as well as rewarding shareholders. The former should make Barclays a leaner, more focused business. The latter is always music to my ears as a potential investor looking to build wealth. To be specific, the business has committed to returning £10bn to shareholders between 2024 and 2026.
A dividend yield of just under 4% at present is also tempting. However, I do understand that dividends are never guaranteed.
Risks and final thoughts
The biggest issue that could potentially hurt Barclays from an investor sentiment view, as well as returns, is economic movement. Again, to be specific, if interest rates do come down, income and margins could be squeezed. This could have a material impact on how much the business could return to shareholders moving forward. I’ll keep an eye on this.
Despite the potential pitfalls mentioned, Barclays looks like a savvy buy for my holdings. An enticing valuation, exciting returns policy, and its vital position in the UK’s banking ecosystem shape my conclusion.
