The past week has seen the biggest rights issue by a UK listed company since 2009 announced by Barclays (LSE: BARC) (NYSE: BCS.US). The total amount it hopes to raise is £5.8bn and will consist of a 1 for 4 rights issue at 185p to current shareholders.
The main reason for the rights issue is a capital shortfall: a 3% capital ratio is now required after European Union legislation and Barclays’ capital ratio is only 2.2%. In addition to the rights issue, it expects to raise £2bn in hybrid debt securities and shrink the balance sheet by around 5%.
Although shares experienced a mild correction when the news emerged, the overall feeling among the financial press seems to be one of apathy. However, I think it’s great news and here’s why.
Clearly, there are issues with Barclays’ balance sheet that need to be fixed. So, why not tackle them head on, raise capital from shareholders and move forward as a stronger and more stable business? Pretending there aren’t any problems or finding ways to get round them is not only risky, but means management devotes crucial time that could better be spent considering how to make the company profitable.
Indeed, this is a bank that had made a profit throughout the credit crunch until it made a loss last year. It has outperformed many of its UK peers over that period and so, with a relatively new CEO now ready to assert himself, it is a good time to fix things that need fixing and make progress.
Of course, a major attraction for shareholders remains the potential for a sizeable yield. Although shares currently yield just 2.4%, this is expected to increase significantly over the next few years as the company has promised to now pay out between 40% and 50% of earnings each year as a dividend. Analysts forecast that dividends per share will be 15p in 2015. This would equate to a yield of over 5% at current prices.
With an adjusted price-to-earnings (P/E) ratio of 8.3, Barclays compares favourably to the financials industry group, which has a P/E of 17.8. A low P/E plus a sizeable potential future yield means ‘buy’ in my book.
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> Peter owns shares in Barclays.