I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.
Right now, I reckon Barclays (LSE: BARC) (NYSE: BCS.US) is looking a great buy for income.
A lot of banks have shrunk their investment banking arms, or exited the business, as a result of the financial crisis. I’d say there’s been a good bit of throwing out the baby with the bathwater. In less extraordinary times, investment banking can be far more profitable than the relatively low margin bread-and-butter business of banking.
Barclays bravely swam against the tide when the financial crisis was in full flood, buying assets of collapsed bank Lehman Brothers and catapulting itself into the small elite of global investment banks. Barclays’ investment banking arm generated half of the group’s revenue and profit last year, and in the long run should be able to push earnings and dividend growth ahead of more staid rivals.
A great opportunity right now
The odour of Barclays’ legacy issues is stronger in the market’s nose than that of just about any other bank, judged by the company’s relative undervaluation on earnings and asset measures.
But it’s income I’m interested in here. Despite Barclays not having the highest current yield in the sector, I believe the long-term dividend growth prospects are excellent.
My belief is founded not only on the already-mentioned engine of investment banking, but also on a potential turbo-boost from Barclays bringing its discordantly high dividend cover down closer to its peers.
The table below shows dividend yield and cover for Barclays, Standard Chartered and HSBC, based on analyst earnings and dividend forecasts for 2014. The table also shows, in the final column, theoretical yields if each bank’s dividend was twice covered by earnings — that’s to say, if each bank retained one half of its earnings for investment in the business and paid the other half to shareholders.
| Â | Share price | Earnings per share (EPS) |
Dividend per share |
Dividend cover |
Dividend yield |
Theoretical dividend yield at 2x cover |
|---|---|---|---|---|---|---|
| Barclays | 249p | 29.9p | 10.6p | 2.8x | 4.3% | 6.0% |
| Standard Chartered | 1,456p | 147.9p | 60.5p | 2.4x | 4.2% | 5.1% |
| HSBC | 687p | 63.7p | 35.6p | 1.8x | 5.2% | 4.6% |
I’ve written before of HSBC as a solid income buy on a high forecast yield of 5.2% and 1.8x dividend cover. But I think Barclays could make for a good pairing of banks with HSBC in an income portfolio, due to Barclays’ potential dividend turbo-boost from lowering cover, and the horsepower of the investment bank.