Why Is Barclays PLC So Cheap?

I was looking over some figures for FTSE 100 companies the other day, and I was struck by how many top companies are on low P/E valuations.

Take Barclays (LSE: BARC) (NYSE: BCS.US), for example.

The share price has fallen by nearly 15% over the past 12 months, to 245p. Based on forecasts for the year to December, the shares are now on a forward P/E of only 10 — way below the long-term FTSE average of 14.

And it’s even more puzzling when we look at the bank’s dividend payments.

Dividends rising

The annual cash payment has been unchanged for two years at 6.5p per share, yielding around 2.5%. But there’s a rapid escalation forecast for this year and next, which would lift the yield to 3.3% and 4.7% respectively. Those forecasts are backed up by Barclays’ last annual results announcement, in which the bank said that “On dividends we expect to target a 40% payout ratio from 2014“.

We also heard that “2014 will be another year of transition, as we continue to make investments and focus on balance sheet optimisation and cost reduction” — and a focus on improving the bank’s capital position has to be good.

So why the downer?

BarclaysTransform period

The recent Q1 update revealed a 5% fall in adjusted pre-tax profit, as the firm’s investment banking arm saw a 28% fall in income. And the investing public don’t seem well pleased by Barclays’ plan to raise investment banking bonuses with the painful “fat cat” years so fresh in our memories.

But looking forward, Barclays’ planned strategy of ring-fencing its riskiest assets in an internal “bad bank” and working on running them down, further reducing costs (including redundancies), and moving to a stronger capital position with less risk and more stable profits — well, that has to be good. Doesn’t it?

You know, occasionally I look at a FTSE 100 company and think I see a serious mismatch between the share price and the true value of the company. And right now, I’m convinced I see that in Barclays.

Leaner, fitter, less risky

Should you buy Barclays shares at today’s price?

I can’t tell you that — it’s something you’ll have to decide for yourself. But I really do think we could be looking back in a few years and thinking what a golden opportunity this was to take a stake in Barclays’ ‘Transform’ plan while the shares were so cheap.

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Alan does not own any shares in Barclays or Tesco. The Motley Fool owns shares of Tesco.