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Why I’d shun Barclays for this 6%+ yielding FTSE 100 giant

Shares in FTSE 100 constituent Barclays (LSE: BARC) are firmly in the red today as investors contemplate a not-insignificant fall in profit at the banking giant over the six months to the end of June. 

Thanks to litigation and conduct charges of £2bn, pre-tax profit came in at £1.66bn — 29% below the £2.34bn achieved in H1 2017. A £1.4bn settlement with the US Department of Justice made up the majority of the fines with the £400m returned as a result of Payment Protection Insurance (PPI) mis-selling another significant contributor

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Had Barclays not sustained these hits, pre-tax profit would have been 20% higher at £3.7bn thanks to a 46% improvement in credit impairment charges, better economic forecasts in the US and a reduction in operating costs. Pre-tax profits rose 30% to £826m in the UK with another £2.71bn coming in from Barclays International.

Having achieved an overall return on tangible equity (RoTE) of 11.6% over the reporting period, the company’s performance so far in 2018 — according to CEO James “Jes” Staley — was indicative of a bankbeginning to demonstrate its true value and potential“. He went on to suggest that today’s numbers increased the likelihood of the company returning “a greater proportion” of profits to its owners going forward.

Ah yes, those juicy dividends. One of the biggest attractions of banking stocks for some time now has been the huge payouts being offered by most of the major players. Industry peers Lloyds Bank and HSBC, for example, are expected to yield 5.4% and 5.5% respectively this year.

Barclays, by comparison, looks set to return 6.5p per share, equating to ‘just’ 3.4% at the current stock price. That’s still not a bad return by most dividend-hunters’ standards but, for a stock in an industry where the threat of regulatory fines is unlikely to ever fully go away, I’m not sure that’s sufficiently enticing. The fact that the £33bn cap juggernaut escaped any “significant” charges in Q2 — the first in a long time — is positive but assuming that Barclays is in the clear for good would be a step too far. The potential impact of Brexit can’t be dismissed either.

So, while today’s numbers are encouraging, I still think there are better income opportunities elsewhere in the sector, even after taking into account Barclay’s seemingly bargain valuation of just 9 times forward earnings for the current year.

Better buy?

In addition to its main rivals, I think geographically diversified insurer and investment manager Legal and General (LSE: LGEN) is another decent alternative to Barclays.

Based on analyst expectations of 16.4p per share for the full year, the £16bn cap offers a monster 6.3% dividend yield. That’s among the highest in the FTSE 100 index. Since big payouts can often be a sign that a company is experiencing difficulties, it’s also pleasing to note that Legal’s looks secure, covered 1.7 times by profits.

Hikes to the dividend may have slowed in recent years but, with a 6.7% increase predicted in 2018, they’re hardly stagnant. Backed by a solid balance sheet, rises have also been far more consistent than over at Barclays.

Half-year figures are due next Thursday. While I doubt we’ll see a significant shift in the share price any time soon (the stock has been trading in the 250p-280p range for the last year), a price of just over 9 times earnings, reducing to 8.5 in 2019, looks seriously good value.

Buy-And-Hold Investing

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Paul Summers 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.