When Barclays (LSE:BARC) issued its Q4 trading update earlier this week, its share price fell 5%. But I think the bank’s future plans could make it interesting for passive income investors.
Overall, I thought the report was pretty strong. But the thing that really caught my eye was its proposed approach to capital returns over the next couple of years.
Capital returns
Barclays is in the process of returning £10bn to investors between the start of 2024 and the end of 2026. It completed around 30% of this in 2024, leaving a further £7bn or so to come.
With the bank currently having a market cap of around £42bn, that means investors stand to get around 16% of their investment back over the next couple of years. That’s not bad at all.
The current dividend yield, however, is around 2.8% and Barclays doesn’t plan to increase its overall dividends in the next couple of years. So where’s the rest of the return coming from?
The answer is share buybacks – in 2024, the firm used £1.8bn to reduce its share count by 4.5%. And its plan to do this should continue to push the dividend higher in the next couple of years.
Share buybacks
In 2024, Barclays distributed a total of £1.2bn in dividends and it plans to maintain this in 2025 and 2026. But the amount each shareholder gets depends on the outstanding share count.
The bank started 2025 with 15.1bn shares outstanding. But if the remaining £4.6bn of its capital return plan gets used for share buybacks, this number could come down to around 13.5bn.
That could take the dividend per share from around 7.95p right now to 8.88p by the end of 2026. And at today’s prices, that’s a yield of just over 3%.
In other words, the bank’s plan to repurchase shares should increase the dividend per share without Barclays having to distribute more cash overall. That’s well worth noting for investors.
Outlook
The outlook for Barclays is also positive. The firm is aiming to increase its return on tangible equity (ROTE) – a key measure of bank profitability – from 10.5% in 2024 to 12% by 2026.
Combining that with a reduced share count could make for a great passive income opportunity. But things are rarely as straightforward as this when it comes to banking.
There are all kinds of things that get in the way of smooth returns from bank stocks. Interest rates moving sharply, changes in regulation, and unforeseen liabilities are all potential issues.
That’s not to say investors should ignore what Barclays is planning to do entirely. But it would be unwise to forget that it operates in an industry where the outlook can change dramatically.
Should I buy the stock?
Despite the recent decline, Barclays shares are up more than 100% over the last 12 months, driven partly by share repurchases. And I think there could be more to come.
Ongoing buybacks might push the share price higher as well as facilitating dividend growth. So while there are inevitable risks, I think passive income investors should take a closer look.
