On Friday, the Barclays (LSE:BARC) share price rose one percent to close around 167p. This means the stock is up 43% over the past year. By any benchmark, this is a good return. Yet if I pull the time frame back even further, over five years the stock is only up around 10%. It’s been higher, but hasn’t been able to maintain those levels. So is it cheap today, or fairly priced?
Reasons for potential cheapness
A key ratio I often look at to decide if a stock looks cheap is the price-to-earnings ratio. This measures the valuation of the company based on the latest reported earnings. Usually, the lower the ratio, the more undervalued the stock could be. Currently, the Barclays P/E ratio is just under 19. The FTSE All Share average is 21.2. This indicates to me that the Barclays share price could be on the cheap side at the moment.
Obviously, I can’t make my investment decision based on one number. So what about other fundamental points? For a start, the share price could be cheap when I take into account inflation and interest rate expectations going forward.
UK inflation is currently running at 2.4%, above the 2% target level from the Bank of England. I think this will cause the bank to raise the base rate next year. If this does happen, then Barclays will benefit. It allows the firm to increase the net interest spread between rates offered to lend versus to deposit. This should ultimately filter through to higher profit.
Risks for the Barclays share price
On the other hand, 167p might be a fair price when I look at some other points. For example, there is real concern in the UK at the moment about what the reaction will be now that all lockdown restrictions have been lifted. The concern is that cases could rise, with the so-called pingdemic causing self-isolation rates to surge.
If pressure is put back onto businesses and individuals, finances will be under pressure. This would likely cause higher loan impairment charges for Barclays. This could hurt the bank given the wide range of credit and lending products offered. These go from mortgages to credit cards, corporate overdrafts to other lines of credit.
Q1 2021 results showed credit impairment charges of just £55m, down from £2.1bn from the same quarter last year. It could be that the Barclays share price is currently not pricing-in the risk of higher charges later this year.
Another point is that even if dividend payments are increased a bit for Barclays shareholders, it might not benefit the share price much. After the payment in April of 1p per share, the yield is just 0.6%. As an income investor, I can find much more appealing yields within the FTSE 100. Even within financials services, I can find yields above 6%. Therefore, I think any potential optimism in the Barclays share price due to the dividend is misplaced.
Overall, I think that the Barclays share price is fairly priced at around 167p. Even if I would err slightly on the side of undervaluation, I don’t think it offers enough upside to make me excited to buy it right now.
