Here’s why the Barclays share price could be the FTSE 100’s best bargain

Banking crisis? Pah! It’s been a full 10 years since the government bailed out failing banks with taxpayers money — and though some people might say they should have been left to rot, that alternative would surely have driven the UK economy to its knees. No, the bailout was, in my opinion, exactly the right thing to do.

But it’s looking increasingly to me like the markets are treating banks as the same pariahs they were back in 2007-8. And I can’t help seeing Barclays (LSE: BARC), which needed no bailout, as being seriously undervalued right now.

Before I go any further, I must point out that my colleague Ian Pierce is less enthusiastic that me, pointing to Barclays’ relatively poor dividend yields. And, on that score, he does make a very good point.

After all, Lloyds Banking Group, which needed a massive bailout in order to survive, was already back to paying dividends of 4.5% in 2017, while Barclays could only offer a measly 1.5%. And Lloyds should be offering 5.8% by 2019, if the analysts’ consensus is close to accurate.

Forecasts for Barclays suggest only 4.4% by 2019 — I mean, even Royal Bank of Scotland, lagging way behind Lloyds in its bailed-out recovery performance, has a yield of 6.1% on the cards for that year.

Long-term focus

But we’re all about long-term investment here at the Motley Fool. E even though I’m pleased to be getting decent dividends from my Lloyds shares so quickly, it seems to me that the pressure for getting dividends back up as quickly as possible is due, at least in part, to those two banks wanting to justify their bailouts.

So maybe Barclays is being deliberately more conservative, feeling less pressure to be seen to be quickly back to maximum health? Looking at dividend cover, Barclays’ forecast yield of 3.5% for 2018 would be covered more than three times by earnings, with 2019’s forecast 4.4% covered only a little less at 2.8 times.

By contrast, forecasts for Lloyds suggest cover of only a little over twice this year, with RBS cover for 2019 (which is its first year of strong yields) coming in less than that.

For me, that suggests Barclays’ approach to dividend yields is more conservatively aimed at long-term sustainability rather than immediate rewards, and I see that as a very good approach. Fellow Fool writer Peter Stephens has suggested exactly the same thing, pointing out that the bank is putting long-term financial strength ahead of the pressure to raise dividends in the short term.

Low valuation

I decry the short-term focus of many investors who are looking at little more than the next quarter, or the next full-year results at best. And I’m consistently sad that large swathes of the professional investment industry seem to have fallen victims to the same mistake. It’s perhaps understandable when fund managers are judged by who’s done best on a quarter-by-quarter basis, but I still reckon that approach is just plain wrong.

Barclays shares, to me, look seriously undervalued at the moment. And I can’t help feeling there’s still a Brexit fear here — which, I think, is unlikely to have any serious deleterious effect on the bank.

Forward P/E multiples stand at under 10 on 2018 forecasts, dropping to only a little over eight on 2019 predictions. On that valuation, I reckon Barclays is one of the FTSE 100’s best bargains.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.