The immediate threat of a no-deal Brexit has receded, for now at least, and that’s given the Barclays (LSE: BARC) share price a boost — since a recent low in August, the shares are up 24%. To put that into perspective though, we are still looking at a 40% price fall since it hit a high in summer 2015, a year before the fateful EU referendum.
The UK’s status as Europe’s banking centre is obviously history now, but the casting of the banking sector as an untouchable pariah is surely overdone. Barclays is actually quite nicely profitable, has a couple of years of earnings growth forecast, and its dividends have come bouncing back.
So could Barclays double your money for you? A dividend-paying stock, provided it can keep the annual payments going, is pretty much guaranteed to do that if you keep it for long enough, but the real question is, how long?
Barclays is currently predicted to deliver a 5.6% yield in 2020, which would be covered around 2.5 times by forecast earnings. That looks like very healthy cover to me and suggests the dividend is sustainable, so let’s assume it’s kept going at the current level over the long term.
An annual return of 5.6%, with dividends reinvested in more Barclays shares, would turn an investment of £1,000 into £2,031 in 13 years — and that’s assuming no share price gains and no more dividend raises.
If the share price rises in line with inflation, say at 2% per year, and earnings and dividends keep pace, that 13 years needed to double your investment would drop to 10 years — resulting in a final value of £2,080 from your initial £1,000 investment.
I think that would be a pretty decent investment return, doubling your money every 10 years. It’s way more than anything a Cash ISA is likely to bring you, as current rates of around 1.5% interest would take 50 years to achieve the same — and it would be beaten by inflation anyway, so you’d lose money in real terms.
But this is assuming the next decade is one of continued negativity towards the banking sector, with the Brexit saga never concluding and the uncertainties going on and on. That’s keeping the Barclays share price valuation low, on a 2020 P/E based on current forecasts of only 7.2, which is around half the FTSE 100‘s long-term average.
Obviously that’s not going to happen, and we’ll almost certainly see a resolution to Brexit uncertainties within the next few months. Providing we don’t crash back to facing a no-deal expulsion, I reckon that will bring about a re-rating of banking stocks.
Back at that pre-referendum peak, Barclays shares were on a P/E of 17 (based on that year’s earnings), though I don’t see them pushing back to that level any time soon — but something approaching the Footsie’s average could be on the cards.
Even with the share priced elevated to a modest P/E of 10, that would imply a 38% share price hike on top of my previous calculations, and an investment today of £1,000 could grow to £2,000 in a little over five years.
Now, these are just speculative estimates, but I do think it suggests that Barclays shares are a good investment now.
Income-seeking investors like you won’t want to miss out on this timely opportunity…
Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!
But here’s the really exciting part…
Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...
He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.
With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.
Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Income Share… free of charge!
Alan Oscroft 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.