The Motley Fool

Why Barclays PLC Is A Key Part Of My Portfolio

Barclays (LSE: BARC) (NYSE: BCS.US) has been somewhat under the radar in recent years, with stable-mates Lloyds and RBS seemingly sharing the limelight in terms of their being potentially returned to the taxpayer, as well as the turnaround stories they have participated in.

However, Barclays has been improving its balance sheet significantly, with (relatively) new CEO Anthony Jenkins seeking to reduce the size of its asset base even further. Although there is still some way to go on this front, the company announced at its recent rights issue that its asset base is set to shrink by a further £80bn, so as to make a leaner and (it is hoped) more profitable bank.

So, although progress is slow, it does appear as though Barclays is in a healthier position, both in terms of its asset base and the leverage of its balance sheet, than it was a few years ago. The recent £5.8bn rights issue will doubtless have aided it in this respect too.

In addition to being fundamentally stronger, Barclays also looks set to become more profitable in future. It is forecast to deliver a net profit of around £6 billion in 2014, which would equate to return on equity of roughly 10%.

Although this is not back to pre-credit crunch levels (and is some way behind the target set by ex-CEO Bob Diamond) it would amount to an impressive achievement and serve as a solid base from which to increase shareholder returns further.

Although we do not yet know how tough 2014 will be, it is likely to be somewhat subdued in comparison to a more ‘normal’ year, so a double-digit return on equity could yet prove to be a good result when potentially challenging trading conditions are taken into account.

Furthermore, Barclays continues to trade on a relatively low price to book ratio of 0.67. Although net assets are set to shrink as the asset base is further reduced, private investors may feel that this reduction (and more) is priced in, so shares are attractively priced at current levels.

Certainly, a one-third reduction in net assets would still put Barclays on a price to book ratio of just 1, with there being no goodwill included in the share price. For a company that is forecast to generate net profits of £6bn in 2014, this looks to be a good offer for shareholders.

So, an improving balance sheet, encouraging return on equity forecasts and a low price to book ratio mean that Barclays could prove to be a welcome addition to private investors’ portfolios. As such, I’m happy to keep holding it.

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> Peter owns shares in Barclays.