If you’re tempted by the Barclays (LSE: BARC) share price, I can’t blame you. The stock looks deeply undervalued at current levels and seems to be one of the most hated banking stocks in the UK right now — even though profits are rising.
Earlier this week, the bank reported its highest profit for the first half of its financial year in nine years. Underlying profitability, which strips out the effects of one-off charges and other costs, hit £3.1bn. Attributable profit came in at £1bn and earnings per share for the six months were 12.6p.
Stronger business
Barclays’ other profitability and quality metrics improved markedly in the first half of 2019. Group return on tangible equity came in at 9.3%. Meanwhile, its Tier 1 capital ratio increased by 40 basis points to 13.4%, substantially above its base requirement. Considering its position and surging profits, management decided to increase the bank’s interim dividend by 20% year-on-year to 3p per share.
Considering all of the above, it’s not clear to me why the market continues to place such a low multiple on the Barclays share price. Indeed, at the time of writing, shares in the bank are trading at forward P/E of less than 7 and a price to tangible book value of just 0.5. Based on current City forecasts, the stock also supports a forward dividend yield of 4.9%.
Companies only really deserve to trade at a discount to book value if they’re unprofitable and losing money for shareholders, which isn’t the case with Barclays. A near double-digit return on tangible equity for the full year would make the bank one of the most profitable in Europe on this metric. Also, the bank’s earnings per share are on track to grow by around a fifth this year, assuming there are no substantial adverse developments during the second half.
That said, there’s the prospect of Brexit in the second half. A messy exit could destabilise the UK economy and, as one of the largest lenders in the UK, Barclays’ business. As we still don’t know what form Brexit will take, this is the big unknown that’s overhanging the bank and its share price.
A positive outcome
However, while a no-deal Brexit might upset the UK economy and cost Barclays some money, unless there’s a severe economic crash, I think the bank has what it takes to weather near-term economic instability. At the same time, there could be tremendous upside on offer for shareholders if a deal is agreed before the end of October.
Weighing up these two scenarios leads me to conclude that Brexit might not be as big an issue for the firm as the market seems to be anticipating. With this being the case, I think the Barclays share price looks undervalued at current levels and could be worth your research time if you’re looking for an undervalued bank with a market-beating dividend yield.
