Is Barclays PLC Totally Toxic?

Psssst! Want the skinny on a money-spinner going cheap?

Those in the know reckon this lucrative little baby will pay out a 4.8% dividend yield next year, yet it’s priced at less than 10 times forecast earnings today.

More importantly, these suckers are priced to go — they’re marked down around 20% on what they’re really worth!

Seriously, the tangible value of these fellas was pegged in March at 284p. They’re yours for less than 235p!

What’s the catch? Okay, I admit they’re damaged goods. Hardly anyone wants to buy them right now. That’s why they’re on offer, see?

Hurry up, this deal can’t last forever!

Barclays in the bargain bin

Tempted? Well I’ve just summarised the case for buying shares in Barclays (LSE: BARC) (NYSE: BCS.US).

Still tempted?

If you’ve now changed your mind to “thanks but no thanks” then I don’t blame you. Banks have been notoriously difficult to call for years.

In the aftermath of the credit crisis, Barclays was touted as a winner – it had escaped a state bailout and it was still paying a dividend. But today it’s trading on a deep discount to its net tangible assets, as I mentioned above.

In contrast, former basket case Lloyds is selling at a 30% premium to its tangible assets.

This divergence seems crazy. We’re six years on from the financial crisis, and few think another banking crash is around the corner. Banks are more tightly regulated, and we know the big US and UK banks are flush with capital. And Barclays seems set to start raising its dividend.

Yet theoretically you could buy Barclays and sell off all its assets and make a nice profit. The market seems to believe buying its shares at full-value risks throwing good money after bad – hence the discount on its net tangible assets.

Totally toxic

On a fundamental basis then, Barclays’ shares are cheap. It’s the unknowns that are keeping the price depressed.

Here are a few fears the market may have:

The clean-up plan isn’t working: Chief exec Antony Jenkins is trying to enact a cultural overhaul of the bank, but where is the evidence it’s paying off? He has failed to restrain bankers pay, and Barclays was recently fined for an attempt to fix the gold price, which happened the day after it was fined for rigging interest rates!

Investment banking’s glory days are over: Profits halved at its investment banking unit in its most recent results. The formerly lucrative area of fixed income trading seems likely to be tough for years. The Lehman Brothers’ investment bankers that Barclays snapped up seemingly for a song might not be worth so much after all.

More fines might be on the way: The huge fine about to be slapped on French bank BNP Paribas by the US for sanction violations – thought likely to be around $9 billion – is another reminder that the authorities are happy to hit big banks for all they can. You may or may not think these mega-fines are fair, but with the currency manipulation allegations of 2013 still unresolved, investors may be shy of getting hit again.

More capital required: Perhaps investors fear the 9.6% core tier one capital ratio Barclays stated for March is either inaccurately calculated or insufficient. Plenty of banks have said they have sufficient capital only to spring rights issues on shareholders.

The dividends aren’t coming: If Barclays can’t increase earnings as forecast then it can’t increase its dividend payments, either. Depressed income from investment banking, mega-fines, and capital raises would all hit earnings per share.

The tangible book value is overstated: This could be due to a combination of all the above factors, and perhaps some more. If Barclays’ operations aren’t as valuable as its own bean counters calculate, then the share price might reflect reality.

So is Barclays a buy?

I know financial journalists are meant to be adamant in their views, but most of my net worth is in shares and I put my money where my mouth is.

And the fact is I cannot make my mind up about Barclays.

I don’t think the market is so stupid as to necessarily send the share price steadily down for no reason, even as the economy seems to be improving and Barclays seems to be getting closer to ramping up its dividends.

So my feeling is that it may be best to wait until the bank has definitely turned the corner, before buying any more than a token amount of the shares.

Sure, I may miss an initial spectacular bounce back. But I think there’ll be plenty of time and profits to come if Barclays can prove it isn’t toxic — well beyond any initial gains.