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Why I think Barclays shares could be perfect for my 2019 ISA

The Barclays (LSE: BARC) share price has fallen by 25% over the last year. For shareholders it’s been disappointing, but I think it pays to look at the bigger picture.

The bank’s performance is improving. The share price doesn’t reflect this yet, in my view, but I think patient investors will be rewarded at some point.

As I’ll explain, I think Barclays could be a great choice if you’re looking for an ISA buy. I’ve also found a smaller financial stock that looks attractive to me after recent news.

Things can only get better?

Barclays’ shareholders received another surprise last week when the head of the group’s investment banking division, Tim Throsby, left suddenly after just two years.

Chief executive Jes Staley will take direct charge of this division, where recent performance has been disappointing. Staley is facing calls from activist investor Edward Bramson to scale back investment banking, but the CEO has made the division a core part of his strategy for the bank’s turnaround.

I’m not too concerned by all of this. Big banks’ internal workings are very difficult for ordinary investors to understand. What I can see is that the big picture is improving at Barclays.

I’d buy these numbers

Excluding the cost of legal settlements and other misconduct costs, pre-tax profit rose by 20% to £5.7bn in 2018. The bank’s underlying return on average tangible equity, a measure of profitability, rose from -1.2% to 8.5%.

The end result was that cash generation improved enough to allow Staley to increase the dividend from 3p to 6.5p, a level last seen in 2015. A further 16% increase to 7.6p is expected for 2019, giving the stock a forecast dividend yield of nearly 5%.

Barclays shares remain very cheap on other measures too. Trading at about 155p, the bank’s stock sits at a discount of 41% to its tangible book value of 262p per share. That discount may have been justified when the bank was losing money. But if the Barclays’ profitability continues to improve, I expect the shares to trade much closer to their book value.

In my view, Barclays offers real value and an attractive income at current levels. I rate them as a buy.

A small-cap alternative

Small-cap lender S & U (LSE: SUS) specialises in non-prime car loans and property bridging finance. This £228m firm has been in business since 1938 and has traded on the London Stock Exchange since 1983. It’s small, but has a long history.

The company is still owned and managed by the founding Coombs family. This continuity has provided patient shareholders with big gains over the years. Since 1999, the group’s share price has risen by 720%. The dividend has risen by 490% over the same period and hasn’t been cut since 1993, the earliest date for which I could find records.

S&U shares have fallen by 20% over the last year as the firm has warned of slowing growth and tightened its lending criteria. I don’t really have a problem with this — it suggests a prudent long-term view from experienced management.

Last week’s results showed the firm generate a return on equity of nearly 18% — an impressive figure. With the shares trading on 7 times forecast earnings and offering a 6.5% dividend yield, I rate S&U as a buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and S & U. 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.