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Will Barclays PLC Ever Beat The FTSE 100?

Over the last month, year, five years and ten years, Barclays (LSE: BARC) has underperformed the FTSE 100. Clearly, that is hugely disappointing for its investors and, while major share price falls during the credit crunch were commonplace in the banking industry, since May 2009 Barclays has delivered zero capital gains.

While that would be understandable if Barclays had been a heavily loss-making company which required a bail out by the government, the reality is that Barclays’ financial performance has been relatively strong in recent years. For example, its earnings grew by 13% last year at a time when a number of its UK-focused peers were either only just returning to profitability or were offering rather pedestrian rates of growth.

Despite this, investor sentiment in Barclays remains weak. One possible positive catalyst is the arrival of the bank’s new CEO Jes Staley, who is due to start work this week. Encouragingly, Barclays appears to have performed relatively well in the stress test results released this week and, looking ahead, the bank’s forecast rise in earnings of 52% during the next two years indicates that it is making strong progress.

Certainly, cost cutting seems necessary in order to make the bank leaner and more efficient, while a pivot towards investment banking appears to be a logical move. However, on the face of it, Barclays appears to be performing well in relation to much of the UK-focused banking sector.

Therefore, the task for the bank’s management team seems to be in convincing the market that Barclays has a bright long term future. This, though, may not be all that difficult when it trades on a price to book value (P/B) ratio of only 0.6 and thus offers superb value for money. In other words, investors could begin to buy into Barclays on valuation grounds – especially when it has a forward price to earnings (P/E) ratio of only 8.8. For a bank with the global reach, diversity of operations and financial strength of Barclays, this seems unjustifiably low.

Where Barclays does lack in comparison to some of its banking peers is with regard to dividends. In fact, the FTSE 100 yields around 3.8% and this compares favourably to Barclays’ yield of just 2.8%. This, though, could easily be raised substantially since Barclays pays out just 29% of profit as a dividend and, looking ahead to next year, it is expected to ramp up shareholder payouts by 26%. With earnings growth in the double digits on the near-term horizon, further dividend growth is on the cards and this has the potential to bolster investor sentiment.

Undoubtedly, Barclays has the right ingredients through which to easily outperform the FTSE 100 in 2016 and beyond. It has a low valuation, a rapidly rising dividend, very bright earnings growth prospects and a new management team which will inevitably put in place a refreshed strategy. Clearly, the past has been a major let-down for investors in Barclays but, in future, its underperformance looks set to become a thing of the past.

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Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.