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Is Barclays PLC A Safe Dividend Investment?

It’s easy to see why investors head for banking and financial services company Barclays (LSE: BARC) (NYSE: BCS.US) when they are hunting for an income stream. After all, at today’s share price of 210p, the forward dividend yield is running at about 5.2% for 2015 and City analysts expect underlying earnings to cover the payout around 2.7 times that year.

Yet many will be wary of the financial sector after the events of recent years and that’s a good thing. Indeed, if you look at Barclays’ share-price chart for the last four years, you’ll see the trend is down.  That situation works against a successful dividend investment in my book.

What’s the point in collecting a growing stream of dividends if capital loss is working against your total investment return?

How is that dividend paid?

The thing to remember about dividends is the only thing that pays them is cash. If a company doesn’t have the cash, it can’t pay the dividend, so a company paying a dividend is showing that its cash flow cuts the mustard, right? 

Wrong. Companies seem to pay dividends for all sorts of reasons, even if they don’t have enough cash coming in, and one thing that seems to challenge Barclays is its performance around cash:

Year to December 2009 2010 2011 2012 2013
Cash at bank (£m) 81,483 97,630 106,894 86,191 45,687
Net cash from operations (£m) 41,844 18,686 29,079 (13,823) (25,174)
Net cash from investing (£m) 11,888 (5,627) (1,912) (7,097) (22,645)
Net increase/decrease in cash (£m) 49,831 17,060 18,273 (27,873) (41,711)

I’m seeing a downwards trend on every cash measure, which seems to be a by-product of the firm’s efforts to turn its fortunes around. Barclays is engaged in a plan to de-risk its business for reputation and conduct, after a string of scandals, and to de-leverage from it teetering position of high financial gearing.

Reform doesn’t come cheap. It sucks out cash, and investors won’t forget last year’s £5.8 billion dilutive rights issue either. However, regulators won’t let Barclays carry on as before, and lower leverage implies scaled-back operations and thus lower profits.

Yet, the dividend is up

Despite the ructions in its business, Barclays keeps growing its dividend payment:

  2009 2010 2011 2012 2013
Dividend per share 2.31p 5.09p 5.56p 6.5p 6.5p

Forward predictions indicate decent dividend growth for 2014 and 2015 too.

Yet all banking companies bolt directly to the cyclicality of the financial industry. We can see that cyclicality playing out now. As the macro-economic cycle unfolds Barclays’ profits seem to be on the rise, but the share price is slipping.

Playing the cyclicals is a difficult game. Viewing the cyclicals as a straightforward buy-and-hold-in-a-diversified-income-portfolio investment is a losers game. The losing might not arrive immediately, but in the fullness of time…

What now?

The cyclicality of the finance sector keeps me out of most banking shares.

Instead, I'm also looking at three companies that look set to do well this year. In fact, the Motley Fools top team of share analysts reckons these three could be among the best picks for 2014 and beyond.

One company is a largely ignored small cap trading at an irresistible discount. There's a play on technology focused high-tech defence applications, and the third share provides a fundamental vehicle to ride emerging-market potential.

Successful stock picking looks set to become more difficult. That's why I'm glad to have the Fool analysts' sign-posting report on my side.  It's free for a little while longer. Find out more by clicking here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.