I’m not a fan of Barclays (LSE: BARC). And in my opinion there are plenty of reasons to avoid the stock, if not to sell it straight away.
Let’s start with the elephant in the room, Brexit. The thought of Britain’s self-willed ejection from the EU is causing many an economist, businessperson and politician to wring their hands and yank their hair in a mad frenzy. Even the prospect of the softest exit is causing plenty of angst over the disruption to the UK economy in the near term and beyond.
It’s not the realm of fantasy to suggest that the hardest of hard exits could be on the cards either. The latest Reuters poll of economists this month showed that the chances of Britain leaving the continental trading block by March 2019 without a deal stands at around one in four.
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There is plenty of will in the divided Conservative Party to see the country wave two fingers at the EU and exit without an accord. Furthermore, with Brexit champion Boris Johnson not-so-subtly mobilising to topple Prime Minister Theresa May and become leader of the country, a scenario that could well come to pass in the coming weeks, investors need to consider how their stocks portfolios would fare in the event of a so-called cliff-edge Brexit.
The struggles are real
For major banks like Barclays, the outcome of the next few months of UK/EU negotiations could either make or break them.
There’s already been plenty of evidence that Barclays may struggle in the event of a no-deal Brexit bashing the economy. News that a fresh slew of misconduct-related costs drove pre-tax profit at the FTSE 100 business 29% lower during January-June grabbed the headlines, but there were signs of strain on the top line too.
Group income in the first half broadly flatlined in the six months to June, at £10.9bn, and its hard to see the top line spark into life as the ongoing economic and political uncertainty created by Brexit looks set to last long beyond the immediate future.
And to illustrate the challenging conditions for it still further, news also emerged that credit impairment charges at Barclays UK rose 4% from January to June, to £415m, with impairments increasing for both personal and business banking customers.
Will dividends disappoint?
Right now City analysts remain largely upbeat over the bank for the medium term, with current estimates suggestive of earnings jumps of 476% this year and 13% in 2019. But given the aforementioned trading troubles, I think it’s easy to see broker projections for this year and beyond be taken down a notch or two, and therefore a forward P/E ratio of 8.7 times isn’t enough to whet my appetite.
I’m also less than taken by Barclays’ growing reputation as an attractive income stock either.
The number crunchers may be forecasting payouts of 6.5p and 7.9p per share for 2018 and 2019 respectively, figures that yield a chunky 3.7% and 4.5%. But as I’ve said before, Barclays’ weak balance sheet, worsened by the expensive PPI-misselling scandal, leads me to doubt that the bank may emerge as a bona fide dividend star.
The share price has slumped around 20% from 2018’s closing highs above 215p back in March, and I reckon further heavy weakness can be expected. It’s a share to be avoided like the plague, in my opinion.
