Investors could once again be forgiven if they were beginning to wonder whether it will ever prove worthwhile to have held on to Barclays (LSE: BARC) in recent years.
After all, despite a noble effort at recovery in the first half of 2015, the shares have spent much of the last 18 months kicking their heels along the bottom of a barrel — just about managing to keep their heads above the 200.0 p threshold.
However, with a flurry of board changes during recent months having culminated in the appointment of ex-JP Morgan investment banker Jes Staley as CEO, now appears a pertinent time to consider whether or not real change could be on the horizon?
Recapping the issues with Barclays
Barclays management admitted in their half-year update that the shares were neither a recovery play, or a ‘growth stock’ any more. This is an admission that pretty much precludes everyone but income investors from the shares.
The only problem with this is that Barclays’ earnings haven’t been anywhere near the level that many investors seem to believe that they were in recent years.
Many of the numbers that receive the majority of investors’ attention are adjusted to exclude the effects of litigation and conduct costs, which are all costs that represent real cash-outflows from the business.
The net effect of this has been that Barclays paid out dividends far in excess of its income on a number of occasions, which is clearly undesirable.
Such a practice erodes the equity value of the business and can expand its valuation even if the share price remains static, or even if it falls in some cases.
This has led me, on previous occasions, to describe the shares as sitting firmly inside value-trap territory.
Changing winds….
Along with the admission on the nature of Barclays shares, the new Chairman also unveiled a noteworthy change in course for the business as a whole earlier this year which, when taken together with the board’s choice of CEO, could herald the beginning of a change for the better at Barclays.
The bank will now focus on a return to top line growth, in addition to costs, as a means of improving returns for investors. This will see the group investing heavily in mortgages, credit cards and, yes, the investment banking division.
Some analysts disagree with the return to revenues growth, out of the belief that this will come at the expense of returns, preferring instead that the group focus on absolute costs. They could be right. After all, costs did rise notably in the third quarter.
However, it also seems reasonable to expect that if the management team do actually remain committed to reducing absolute costs, and they maintain a simultaneous effort in this regard, then maybe such a strategy will pay off over the longer term.
Summing Up
Whether or not there really is a change for the better on the horizon will depend entirely upon the attitude of the new CEO toward the aforementioned costs, the investment bank and growth.
Only time will tell just what this attitude is to be, although we should get some useful insight this week after Staley begins his tenure on Tuesday.
Last but by no means least, the eventual elimination of conduct provisions (fines) will also be critical for management to be successful in turning around Barclays fortunes, particularly if they truly intend to position the shares as an income play.
Nevertheless, with these currently changing hands at 224p (close to their three year low), the less risk-averse investor might consider dipping a toe in the water now…
