Barclays (LSE: BARC) (NYSE: BCS.US), the big high-street bank that didn’t need a taxpayer bailout to survive the banking crisis! That’s got to say something, hasn’t it?
Forecasts suggest rises in earnings per share (EPS) of 28% this year followed by 26% next, with dividends set to easily outstrip inflation and provide yields of 3.1% in 2014 and 4.3% in 2016. That would bring the price to earnings (P/E) ratio down to 10.7 and 8.5 over the two years, and that’s low — the long-term average for the FTSE 100 stands at around 14.
Why not?
Let’s start with reasons not to buy Barclays.
For one thing, Barclays’ investment banking arm is hurting, and that’s the bit that makes the seriously big money in the good times. Things are so hard that 2,700 investment banking jobs have already been axed, from a total of 7,000 planned redundancies over a three-year period.
Bonuses have been in for some serious criticism, too, after Barclays announced the total paid in incentives would rise this year even after EPS slumped by 56% in 2013. But are objections to higher pay packages really justified? Isn’t it better to be rewarding good people who are more able to get the bank out of the bad times rather than handing out the big cash when everything is going swimmingly and nobody can really do wrong?
More fines?
Another thing that is clearly weighing on sentiment is the fear of possible further financial penalties.
Barclays has already had to stump up a fair bit for its part in the Libor-fixing scandal and its mis-selling of payment protection insurance, and has set aside a wodge of cash for other “legacy” issues. And it is currently under investigation over its “dark pool” activities — the trading of securities on private exchanges not open to the public. Dark pool trading allows, for example, a big player to buy or sell large amounts of shares without the wider world getting to know and without unfavourably shifting prices.
The ethics are, obviously, questionable, and Barclays is under investigation for allegedly covering up the activities of some traders on Wall Street — and some are suggesting penalties exceeding the Libor fine if proven.
Pessimism
But it looks to me like there’s a lot of pessimism already built into the Barclays share price, after a 20% fall over the past 12 months to 227p while the FTSE 100 gained 3%. And over five years, we’re looking at a fall of about a third.
And let’s face it, fines amounting to hundreds of millions sound bad when they make the headlines, but set against a forecast pre-tax profit of more than £6bn for this year, it’s small change in the long-term scheme of things.
Remember, it’s usually good to buy when others are fearful.