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When I look at the Barclays (LSE: BARC), I really wonder what is stopping investors from buying.
I know there are reasons why bank stocks are going down right now. In fact, Barclays shares have also risen a bit in recent weeks. And they remain practically stable in five years, which is not a disaster.
Still, Barclays remains an investment disappointment even before the 2020 stock market crash. In fact, FTSE 100 Banks in general have had a terrible decade and more.
Weak stock price
With earnings rising, forecasts put the stock at a price-to-earnings (P/E) ratio of just 5.5. And it could fall as low as four by 2026. And no matter how we think we should value bank stocks, that seems too low to me.
In results released on February 20, Barclays announced a further £1 billion share buyback. What's more, the board said it plans to “return at least £10 billion of capital to shareholders between 2024 and 2026, through dividends and share buybacks, with a continued preference for buybacks.“
The total market capitalization is £25 billion. So for any share we buy at the current price, the bank wants to give us back the equivalent of 40% over the next three years. Who wouldn't want a piece of that?
The fact that there is a preference for buybacks suggests that the board considers the shares to be cheap. But we still have forecast dividend yields of 5%, and rising, to look forward to.
Why so low?
The stock price perked up a bit on this news. But I'd say it's just a scratch of where the true valuation should be.
So why are stocks so low and what are the risks? Well, I can't pretend there aren't any.
Barclays reported lower profits in 2023, with the latest quarter looking tough again. The company also faced restructuring costs in five key divisions. This is supposed to result in cost savings and a reduction in workforce. But we won't know how it will work for a while yet.
The bank is also the only one in the UK that still has a large investment banking arm. And that adds additional risk, at a time when the global economy is so uncertain.
I think the structure and extent of Barclays' business is good. It makes the bank stand out as unique among its UK peers. But the outcome of it all will be crucial in determining where the stock price goes.
Easy peasy?
Someday we will again have low interest rates, a drop in bad debt risk, stable fuel prices and global economic growth. If Barclays shares were still at the same price when that happened, I think it really would be a no-brainer buy.
Between now and then, investors will have to weigh the low valuation against the current risks.
For me, however, Barclays is firmly on my stocks and Shares ISA buy list for the next time I have cash to invest.
