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Barclays restores dividends, but I reckon these are 2 of the best stocks to buy now

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Today’s big news from banking company Barclays (LSE: BARC) is the resumption of shareholder dividends.

Chief executive James E Staley said in the full-year results report the “time is right” because of the “strength” of the business. The company announced a full-year dividend worth 1p per share for 2020 and an intention to buy back £700m of its own shares.

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Better trading ahead for Barclays

Staley reckons Barclays is capable of delivering a “meaningful” improvement in shareholder returns for 2021. And it’s a good job the process of investing is all about looking ahead, because today’s figures don’t look pretty.

Profits did come in ahead of forecasts. Even so, attributable profit dropped by 38% compared to the prior year, driving a plunge in earnings per share of 61%. The return on shareholders’ equity fell from 5.3% a year ago to 3.2%.

Pandemic-related impairment charges of some £4.8bn took their toll on the figures. But in a note of optimism, the bank said the impairment charge in the fourth quarter was down 19% on the previous quarter. The figure came in around £500m.

Judging by today’s weak share price, investors were expecting more encouragement about future trading. But, alas, the immediate outlook remains uncertain. Nevertheless, with the stock near 150p, it’s still around 90% higher than its low of last spring. And there’s some logic in that. Bank stocks are known for their tendency to be the first into and first out of recessions.

Even now, the valuation looks modest. The price-to-tangible-asset value is running just below 0.5. And City analysts have pencilled in a robust double-digit rebound in earnings for 2021.

Of course, stock markets look ahead, so shares tend to move before the improvements are obvious in the real economy. And one of the dangers now is that investors may have driven the bank shares up too far, or too soon. If general economic recovery from the pandemic stalls, we could see Barclays’ business struggle from where it is now.

2 stocks to buy now

If I’d been prescient enough to have invested in Barclays at last year’s lows, I’d think about taking some or all my money off the table now. The ‘trouble’ with bank shares is the underlying businesses are so cyclical that their shares tend to be hyper-responsive to changes in the general economic outlook. I’d argue that there are better investments than the banks to be made now. However, I could be wrong about that and Barclays’ business could recover swiftly and the shares could fly.

However, I like the look of FTSE Small Cap groundworks and geotechnical solutions provider Keller. The company has been generating lots of free cash flow and sports a modest valuation. I think the business has the potential to thrive if the general economic recovery gains traction. Equally, profits and the share price could fall if a recovery stalls.

In another example, I’m keen on FTSE AIM packaging and automation solutions provider Mpac. The firm has a net cash position on the balance sheet and an undemanding valuation. City analysts expect a double-digit percentage bounce-back in earnings during 2021. Of course, if earnings fall short of expectations, the share price could fall.

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Kevin Godbold has no position in any share 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.

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