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How Barclays PLC Could Rocket 160% In 4 Years

barclaysThe shares of FTSE 100 bank Barclays (LSE: BARC) (NYSE: BCS.US), currently trading at about 240p, have fallen 18% over the last four years, massively underperforming the 26% gain of the index.

But the story could change over the next four years, as Barclays’ shares have the potential to rocket 160%.

Here’s how

Despite avoiding a government bailout during the financial crisis of 2008/9, Barclays has had about as much trouble with its business and reputation as state-aided banks Royal Bank of Scotland and Lloyds.

Barclays’ recent announcement of “a bold simplification” of the business may finally get the group moving in the right direction. The long-problematic investment bank is to be drastically shrunk, with a loss of 7,000 jobs by 2016, part of a sweeping range of staff and other cost cuts that Barclays reckons will see annual operating expenses reduced by £2bn.

Chief executive Antony Jenkins said: “In the future, Barclays will be leaner, stronger, much better balanced and well positioned to deliver lower volatility, higher returns, and growth”.

City analysts are optimistic the corner is being turned. The analysts are forecasting that earnings per share (EPS) will increase at a compound annual growth rate of about 25%, helped by a big initial leap from last year’s lowly 16.7p, and on to something over 40p by the year ending December 2017 — a total increase of about 140%.

If the shares track earnings, and continue to rate on their current historic price-to-earnings (P/E) ratio of 15, the price will of course rise by the same 140% as EPS, putting Barclays’ shares at above 600p four years from now.

Given the forecast progress, 10 years on from the financial crisis, a modest re-rating of Barclays’ shares to bring them in line with the FTSE 100’s long-term average historic P/E of 16 wouldn’t be outlandish. We’d then see the price at, say, 650p — a 160% rise from today’s 250p.

Investors would also bag four years of dividends. Analysts see strong dividend progression on the back of the EPS growth. Forecasts suggest a total of 55p a share paid out over the period. Put another way, a £1,000 investment in Barclays today would deliver £220 in dividends alone.

Of course, none of this is guaranteed. However, history tells us that companies are capable of delivering the kind of return I've outlined here -- or even higher.

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G A Chester does not own any shares mentioned in this article.