The bad news
At the end of July, regulators forced Barclays (LSE: BARC)(NYSE: BCS.US) to raise money. Management chose to achieve this by launching a discounted rights issue, offering shareholders the chance to buy one new share in the company for every one that they already own. The effect is that holders will have to stump up more money just to maintain their share of the company.
The half-year results also included a huge £1.35bn addition to miselling compensation costs.
Sentiment
At today’s price, the market is showing little goodwill toward Barclays. That not entirely unreasonable. A bank that needs capital is never going to be popular. Worse, the huge increase in PPI costs suggests that Barclays did not have a proper handle on the problem.
The bank is still tainted by past scandals. Unless it can enjoy a sustained period without more bad news, many investors will continue to avoid the shares.
The future
However, I believe that the next year or two could force the market to change its mind about Barclays. First, the world’s major economies are improving. This has been more than matched by the major stock indices. As a bank with a substantial capital markets operation, Barclays is ideally positioned to benefit from these conditions.
Barclays stock has been held back in recent months by speculation that it might have to raise funds. Now that uncertainty is gone, investors can value the shares with more confidence. The rights issue will also allow Barclays to rapidly increase its dividend.
Barclays will likely release its Q3 results near the end of October.
Valuation
Even after issuing lots of new shares, analysts still expect Barclays to make earnings per share (EPS) of around 34p in 2014. That puts the shares today on a 2014 P/E of 8.4. Do Barclays’ prospects really merit such a miserable rating? After all, sector peer Lloyds trades on 11.8 times forecasts for next year.
It could be 2014 before Barclays shares are substantially re-rated. However, they are dirt cheap today and there is a 2.4% dividend on offer.
You might think that Barclays shares should be 50% higher. I’d agree.
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> David owns shares in Barclays.