The Motley Fool

How low can the Barclays share price go?

Billionaire investor Warren Buffett famously said that “price is what you pay, value is what you get”.

What Mr Buffett meant was that the market price of a share isn’t always a fair indication of what it’s worth. Buying undervalued stocks is how value investors like him make their money.

It’s an approach that can require patience, as Barclays (LSE: BARC) shareholders have discovered in recent years. The value of their stock has fallen by nearly 20% over the last six months and by 50% since hitting a post-crisis peak in 2009.

I wouldn’t blame you for giving up after a performance like that. But I think selling now could be a mistake.

Although there are still some risks ahead, Barclays’ recent half-year results suggest to me that the bank’s recovery really has reached a turning point.

Things can only get better?

Chief executive Jes Staley has faced criticism over his handling of a whistleblower incident. But he has managed to resolve most of the bank’s outstanding misconduct issues. The biggest of these was a £1.4bn settlement with the US Department of Justice earlier this year.

Compensation claims for Payment Protection Insurance (PPI) will also come to an end in August 2019, closing off a persistent leakage of cash from most UK banks’ balance sheets.

The DoJ settlement meant that Barclays’ pre-tax profit fell from £2,341m to £1,659m during the first half of this year. But without litigation and misconduct charges, the group’s pre-tax profit would have increased by 20% to £3,701m.

More profitable banking

Shareholders need to see an end to misconduct charges. But that’s not enough on its own.

The bank’s assets need to start working harder to earn their keep. The simplest way to measure this is with return on equity, or RoE. This compares profit after tax with a bank’s net asset value.

On an underlying basis, Barclays’ return on average tangible equity rose from -1.6% to +11.6% during the first half of this year. Alongside this, the bank’s cost-to-income ratio fell from 64% to 61%.

Big dividends are coming

The improvement in underlying profitability was masked during the first half by £2bn of misconduct and litigation charges. But as these costs move into the past, I believe the bank should start to generate enough surplus capital to support more generous dividends.

Mr Staley certainly seems to think so. In August, he confirmed plans to pay a full-year dividend of 6.5p per share for 2018 — more than double last year’s payout of 3p per share.

Too cheap to ignore?

I’m going to stick my neck out and say that I think Barclays shares are probably near the bottom. I think further big falls are unlikely unless new problems emerge.

As things stand, the stock trades at a 30% discount to its tangible book value and has a forecast P/E of just 8.3. Add in this year’s forecast dividend yield of 3.7%, and the shares look cheap to me.

City analysts are bullish too. They expect earnings growth of 10% next year, plus another big dividend hike.

I think this could be a good time to start buying.

Want To Retire Early?

Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.

The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?

Roland Head 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.