Is Barclays PLC An Annuity Alternative?

Barclays (LSE: BARC) (NYSE: BCS.US) is out of favour at the moment, and its share price has slumped to just 239p, leaving the bank’s shares trading on a 2014 forecast P/E of just 8.5, with a prospective yield of 3.9%.

barclaysDespite this, I believe Barclays has the makings of a great long-term income stock — and the bank’s current problems are providing a cheap buying opportunity that could deliver outstanding long-term dividend yields to patient investors.

Indeed, I believe Barclays could benefit from this year’s Budget pension changes, which Legal & General estimates could lead to £6bn per year being withdrawn from the annuity market — much of which I expect will be invested in dividend-paying stocks, instead.

Here are three reasons why I’m currently a buyer of Barclays:

1. Sentiment is at rock bottom

Barclays isn’t popular — not with consumers, investors or politicians. According to the Financial Conduct Authority (FCA), it’s the most complained-about British bank; almost 310,000 new complaints from retail customers were logged against Barclays during the second half of last year.

Barclays is still battling various legal troubles. The bank recently settled a £70m Libor-rigging test case out of court, avoiding the embarrassing spectacle of several former and current Barclays managers, including former CEO Bob Diamond, having to testify in court.

In my view, these problems are relatively short term: ultimately Barclays is a large, profitable and diverse bank, whose portfolio includes one of the UK’s biggest and most profitable credit cards, Barclaycard, as well as a fast-growing African banking business.

Billionaire investor Warren Buffett famously said that investors should “be greedy only when others are fearful”. The current negative sentiment on Barclays won’t last forever, and when it starts to improve, I expect Barclays share price to rise, too.

2. It’s cheap

I’ve already mentioned the bank’s forecast P/E of just 8.5, but Barclays’ results last year weren’t that bad either, if you ignore the exceptional costs.

Based on last year’s adjusted earnings, Barclays’ shares are trading on a P/E of 14.3 and a yield of 2.7%. That’s not expensive compared to the wider market, and provides a good baseline for performance improvements this year.

An added bonus is that Barclays’ shares currently trade at just 85% of the bank’s tangible net asset value. If the market re-rates Barclays’ shares at one times book value, the bank’s share price would rise by nearly 20%.

Buy Barclays for your pension?

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Roland owns shares in Barclays but not in any of the other companies mentioned in this article.