The Barclays (LSE: BARC) share price has been on a tear over the last year, rising 59.88%. I can’t say I’m surprised.
Last year I decided the big FTSE 100 banks were due a re-rating and snapped up shares in Lloyds Banking Group. Lloyds has done well too, up 41.64% in 12 months. Just not as well as Barclays.
While Lloyds focused on UK personal and small business banking after the financial crisis, Barclays held on to its investment banking arm. That makes it more of a freewheeling swashbuckler than stay-at-home Lloyds. It also means there’s room for both in my portfolio, as the risks and rewards balance nicely. But have I left it too late to buy Barclays?
FTSE 100 banks are flying
Today’s price-to-earnings (P/E) valuation of 8.13 suggests its shares are still good value. That’s well below the FTSE 100 average of 15.3. I’m surprised it’s so cheap, but then its P/E fell as low as 4 or 5 last year. That looked crazy at the time, even crazier today.
Barclays’ price-to-book ratio is just 0.5, just half the figure of 1 that’s usually seen as fair value. This stock is still cheap.
It posted full-year pre-tax profit of £6.55bn in 2023. That’s a lot of money, but was down from £7.01bn the year before.
The firm’s return on tangible equity (RoTE) also dipped in 2023, from 10.4% to 9%, while earnings per share (EPS) fell from 30.8p to 27.7p.
The downwards trend continued in the first half of 2024. Pre-tax profits dipped from £4.56bn to £4.22bn, while RoTE fell from 13.2% to 11.1%. EPS also retreated, from 19.9p to 18.6p. In previous years, Barclays would have been punished for that kind of slippage, but sentiment is far more positive today.
It helped that Barclays lifted guidance for full-year group net interest income, boosted by interest rates staying higher for longer. Higher rates widen net interest margins, the difference between what banks pay savers and charge borrowers.
Dividend income and growth
Barclays further cheered investors by completing a £1bn share buyback and announcing a further £750m. It also hiked its half-year dividend from 2.7p to 2.9p per share.
As Barclays shares rocket, the dividend yield has slumped to a modest 3.5%. That’s below the FTSE 100 average of 3.83%. Its yield is forecast to climb steadily though, hitting 3.72% this year and 4.03% in 2025.
A key concern is that net interest margins will be squeezed when central bankers start slashing interest rates further. That process has started and could accelerate if the US Federal Reserve cuts aggressively to avert recession.
Barclays is also under constant pressure from campaigners, who accuse it of everything from funding fossil fuels to unfairly profiting from higher interest rates. A windfall tax remains a low-level threat. A global economic slowdown a bigger one.
I’d love to hold Barclays shares but I’m always wary of buying a stock on the back of such a strong run. Usually, the good times end when I hop on board. So I’ll wait for a market wobble, and look to buy on a dip.
