Bank shares remain a no-go area for some investors. But I believe these bombed-out stocks offer some of the best opportunities in the FTSE 100.
Today, I want to take a look at the latest figures from Barclays (LSE: BARC) and explain why I’m bullish about the outlook for this 329 year-old bank.
Barclays’ underlying pre-tax profit rose by 20% to £5.7bn last year. It cut operating costs by 2%, while bad debt charges fell by an impressive 37% to £1.5bn.
Shareholders were rewarded with a dividend of 6.5p per share for the full year — more than double last year’s payout of 3p per share. The outlook was clouded by certain one-off costs relating to past misdeeds. But, as I’ll explain, this cloud may have a silver lining.
Indeed, I think Barclays offers investors a classic value investing opportunity — it’s cheap, improving and has the potential to deliver a step-change in profits in the near future.
1. Too cheap to ignore?
Barclays’ shares look cheap to me on three key value metrics.
Assets: With a last-seen share price of 165p, the stock trades at a 37% discount to the bank’s tangible net asset value of 262p per share.
Income: Last year’s dividend hike means that the shares also offer an appealing level of income, in my view. The 2018 dividend of 6.5p per share gives the stock a dividend yield of 4%.
Looking ahead, chief executive Jes Staley is expected to increase the dividend by 23% to 8p per share this year. Based on these City forecasts, the stock offers a 2019 forecast yield of 4.9%.
Earnings: The bank’s stock currently trades on just 7.1 times 2019 forecast earnings. That looks decent value to me.
2. Increasingly profitable
Of course, sometimes a stock is cheap for a reason. Banks tend to trade at a discount to their book value when investors think that their assets, such as loans, won’t generate attractive returns.
This has been a big problem for Barclays and other banks in recent years. But things are changing. On an underlying basis, Barclays return on tangible equity rose to 8.5% last year. In 2017, the bank reported a figure of -1.2%.
This performance brings the bank close to its 2019 target of 9%+ return on tangible equity. The only problem is that this is an underlying figure — including all one-off costs, Barclays return on tangible equity was just 3.6% last year. Let me explain what this means.
3. A big step forward
Barclays’ past misdeeds are no secret. Last year, settlements and charges relating to “litigation and conduct” cost the bank £2.2bn. But this nightmare should nearly be over.
When this shadow is removed from profits, the amount of real surplus cash available for shareholder returns should improve markedly. Staley has already indicated plans to maintain dividend growth and carry out share buybacks “as and when appropriate.”
When the bank starts to report ‘clean’ profits that are free of major misconduct charges, I think the stock will start to trade closer to its tangible book value of 262p per share. If I’m right, the shares could rise by 50% from current levels over the next couple of years. I’d buy.
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.