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A FTSE 100 share I’d sell along with Barclays plc

Barclays (LSE: BARC) has seen its share price spike in Friday mid-afternoon trading as investors have reacted positively to news of a settlement with US authorities over claims of prior misconduct.

To recap, the FTSE 100 bank was hauled over the coals by the Department of Justice over allegations concerning the sale of residential mortgage-backed securities between 2005 and 2007. Today’s deal “resolves all actual and potential civil claims” by the justice department, Barclays said in a statement, and the $2bn penalty is viewed as being rather light in some quarters.

Commenting on the matter, chief executive Jes Staley said: “The completion of our restructuring in 2017, and putting significant legacy matters like this one behind us, mean Barclays is well positioned to produce stronger earnings going forward, and to start returning a greater proportion of those earnings to our shareholders over time.” 

Too much risk

While the news has brought more buyers out in end-of-month trading, I am not one of those fancying a slice of Barclays right now.

Firstly, the bank still faces the prospect of further significant misconduct charges from elsewhere, whether it be related to the Serious Fraud Office investigation over a loan it made to Qatar around the time of the 2008 financial crisis, or further heavy provisions related to the long-running PPI mis-selling scandal (for which it booked at extra £700m worth of provisions in 2017 alone).

Away from this, I am also concerned over the impact of a slowing economy on Barclays’ profits should bad loans rise and revenues fall. This could put extra pressure on the company as it faces stricter stress tests from the Bank of England from 2018 onwards.

City analysts are expecting earnings at Barclays to explode to 20.4p per share in 2018 from 3.5p last year, and then to rise to 23.5p. However, given the bank’s fragile balance sheet and the strong possibility that these medium-term forecasts could be blown wildly off course, I am happy to forget about its low forward P/E ratio of 10.2 times and give it an extremely wide berth.

Leave it on the shelf

Another Footsie share I wouldn’t touch with a bargepole today is Marks and Spencer  (LSE: MKS).

As if the retailer’s plan to transform its underperforming fashion lines wasn’t difficult enough, a backcloth of sliding retail indicators isn’t making things any easier. Just yesterday the  Confederation of British Industry announced that retail sales in March “were significantly below normal” for the time of year and were at their weakest for close to five years. And the situation does not look likely to improve any time soon as economic conditions seem set to remain tough.

City brokers are expecting M&S to follow a predicted 9% earnings slump for the year to March 2018 with a further 1% fall next year. However, I see a broad margin for medium-term estimates to be cut down even further, making — like Barclays — the business an unattractive pick despite its cheap valuation, a P/E ratio of 10 times for next year, and its gigantic 6.9% dividend yield.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.