It’s been a tough handful of years for income-seeking investors in banking shares. That’s because profitability in the sector has, in the main, been hit hard by PPI provisions, a scaling back of investment banking activities and depressed economic activity.
Indeed, some banks, such as RBS, have not paid a dividend in the last five years. However, Barclays (LSE: BARC) (NYSE: BCS.US), on the other hand, has been steadily increasing its dividend over the last few years, such that it paid out 6.5p per share in 2013.
Certainly, this did not equate to a great yield — Barclays currently yields just 2.6%, which is considerably below the FTSE 100 yield of 3.5%. However, Barclays is forecast to continue increasing its dividend per share over the next two years and, in 2015, is expected to pay out just over 13p per share. That’s a growth rate of 42% in each of the next two years, which is hugely impressive.
Using today’s price of 252p per share, that would equate to a yield of 5.2% (assuming its share price does not move higher between now and 2015). This is extremely impressive and would put Barclays among the highest yielding shares in the FTSE 100 index.
Furthermore, even though Barclays is set to increase its dividend per share at a staggeringly fast pace over the next two years, it could pay an even higher proportion of profits out as a dividend. For instance, assuming it does pay 13p per share in 2015 (and meets its earnings forecasts), that would equate to a payout ratio (the proportion of profits paid out as a dividend) of just 38%.
Obviously, Barclays will need to retain some capital to beef up its balance sheet and to reinvest in the business, but it’s unlikely to need to retain 62% of profits for such endeavours. Indeed, sector peer Lloyds has stated that it is aiming to pay out up to two-thirds of profits as dividends by 2016, which suggests that Barclays could also afford to pay out a greater proportion of earnings as dividends.
So, while Barclays may not seem like a great income play at the moment, the forecast increase in dividends per share and the potential for a higher payout ratio mean that it certainly has the potential to be a super income stock over the medium term.
