Why Barclays PLC Should Yield 6.3% Next Year

Barclays’ (LSE: BARC) (NYSE: BCS.US) shares currently offers a respectable dividend yield of 2.7%: just under the wider FTSE 100’s average dividend yield of 3.4%. 

However, the bank is currently going through a transition and management has placed shareholders at the heart of the group’s turnaround plan.

As a result, the bank intends to payout 40% to 50% of net profit in dividends.

With City forecasts currently predicting earnings per share of 30.4p for 2015, this implies that a dividend payout of 15.2p could be on the cards. This is a yield of 6.3% based on current prices. But is this payout sustainable?

How safe is the payout?

Shareholders would be right to question the sustainability of this payout, given Barclays’ performance over the past year or so.

Indeed, Barclays has hardly been investor-friendly, asking shareholders to support a rights issue in order to bolster the balance sheet and then revealing a 25% slump in underlying profits.

However, Barclays is now trying to clean up its act. The bank is targeting sustainable shareholder returns and a more stable income stream. 

For example, Barclays is in the middle of completing ‘Project Transform’, a plan designed to cut the bank’s cost base and restore relations with customers. 

What’s more, the bank is cutting thousands of jobs and scaling in Wall Street investment banking ambitions. Hopefully, a reduced exposure to investment banking will cut the bank’s exposure to risky assets. The bank is also creating a ‘bad bank’ to spin off unwanted assets.

Barclays is targeting a return on equity, a key measure of banking profitability, of 12%, more than three times the figure reported last year. 

Not all plain sailing

Still, while Barclays plans to improve returns by taking less risk and cutting costs, it won’t be plain sailing ahead.

It has recently been revealed that Barclays may be fined £300m by the Serious Fraud Office, after an investigation into the advisory fees paid by the bank to Qatari investors.

Then there is the issue of the bad bank assets that Barclays will have to wind down over time; losses taken on these assets will impact earnings. And, of course, there is the cost of creating a bad bank, which is expected to be in the region of £800m, taking Barclays’ total restructuring costs to around £3.5bn.

But despite these costs, Barclays’ management now has a clear set of targets for the bank. Indeed, with a bad bank in place, Barclays’ shareholders and management will be able to see how much progress the bank is making winding down past mistakes.

Additionally, Barclays’ set of performance targets means that shareholders can judge the bank’s progress, selling up if things aren’t going to plan.