The Barclays (LSE: BARC) share price has been on a tear, soaring 65% over the past year and an eye-popping 110% over two.
That makes it one of the FTSE 100’s hottest stocks, and loyal investors are finally seeing handsome returns after years of struggle. But after such a strong rally, can the momentum continue?
I’m always cautious about chasing a stock that’s already enjoyed a massive run. Also, there are signs of a slowdown, with Barclays shares dipping 2% in the last month.
Can this FTSE 100 bank keep going?
Yet the stock still looks cheap to me. It trades at just 8.4 times earnings, while its price-to-book ratio sits at 0.6. That’s well below the 1.0 typically seen as fair value for banks.
For income seekers, the dividend yield has dropped to 2.8% after the rally. But I wouldn’t be too disappointed by that. The forward yield is forecast to rise to 3%, and it’s covered a whopping 4.6 times by earnings. That’s an incredibly strong cushion, suggesting plenty of room for further hikes.
In February, Barclays said it will reward shareholders with another £1bn share buyback after a bumper set of full-year results. These saw pre-tax profits jump 24% to £8.1bn. Investment banking income rose 7% to £11.8bn as dealmaking bounced back.
The final quarter showed the momentum gathering pace, with Q4 profits spiralling from £100m to £1.7bn year on year. All this helped drive the shares to their highest level since 2010. But the board did set aside £90m for potential costs from the motor finance mis-selling scandal.
Of course, banks are never far from trouble. Earlier this month, Barclays suffered a three-day IT meltdown that left customers locked out of their accounts. The bank is now set to pay up to £7.5m in compensation. In today’s digital-first world, that kind of disruption just isn’t acceptable, especially given the drive to shutter branches. It partly explains the recent share price dip.
Share buybacks and growth hopes
The 17 analysts covering Barclays produce a median price target of almost 357p. If correct, that’s a solid increase of almost 20% from today’s 297.5p. Combine that with the dividend yield, and investors could be looking at a total return of more than 23%.
Of course, forecasts are just that – forecasts. In today’s uncertain world, plenty could change.
While higher interest rates have boosted Barclays’ margins, they also risk squeezing the global economy and pushing up debt impairments. If borrowers start struggling, bad loans could eat into profits. Unlike most FTSE 100 banks, Barclays still has a foot in the US, and could take a hit if the North American economy continues to struggle.
Barclays still has plenty of room to grow, and its valuation remains attractive. Looking ahead, the group expects to generate around £12.2bn in net interest income for 2025, up from £11.2bn. Operating margins are expected to climb from 30.3% to 38.3% this year.
For those looking to add exposure to banking stocks, it’s certainly one to consider.
There are signs that it can keep the party going for a while yet. Brokers seem to think so. But after doubling in two years, investors shouldn’t expect another quickfire surge.
