When I look at the Barclays (LSE: BARC) share price, I really wonder what’s holding investors back from buying.
I know there are reasons why bank shares are down right now. Barclays shares have actually ticked up a bit in the past few weeks too. And they’re about flat over five years, which is not quite a disaster.
Still, Barclays has still been an investment disappointment since even before the 2020 stock market crash. In fact, FTSE 100 banks in general have had a dreadful decade and more.
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Weak share price
With earnings rising, forecasts put the stock on a price-to-earnings (P/E) ratio of only 5.5. And it could drop as low as four by 2026. And however we think we should value bank stocks, that just looks way too low to me.
In results posted on 20 February, Barclays announced a new £1bn share buyback. what’s more, the board said it plans “to return at least £10bn of capital to shareholders between 2024 and 2026, through dividends and share buybacks, with a continued preference for buybacks.“
The whole market cap is £25bn. So for any share we buy at today’s price, the bank wants to return the equivalent of 40% to us in the next three years. Who wouldn’t want a slice of that?
That there’s a preference for buybacks suggests the board sees the shares as cheap. But we still have forecast dividend yields of 5%, and rising, to look forward to.
Why so low?
The share price did perk up a bit on this news. But I’d say it’s barely a scratch on where the true valuation should be.
So why are the shares so low, and what are the risks? Well, I can’t pretend there aren’t any.
Barclays reported lower profits in 2023, with the final quarter looking tough again. The company also faced costs of restructuring into five key divisions. That’s supposed to result in costs savings and a workforce reduction. But we won’t know how it will work out for a while yet.
The bank is also the only UK one that still has a large investment banking arm. And that adds extra risk, at a time when the global economy is so uncertain.
I think Barclays’ structure and business spread is a good one. It does make the bank stand out as unique among its UK peers. But how it all works out will be crucial for where the share price goes.
No-brainer?
One day we’ll get back to low interest rates, falling bad debt risk, stable fuel prices and global economic growth. If Barclays shares were still about the same price when that happened, I think they really would be a no-brainer buy.
Between now and then, investors need to weigh up the low valuation with today’s risks.
For me, though, Barclays is firmly on my Stocks and Shares ISA buy list for when I next have the cash to invest.
