Barclays (LSE: BARC) (NYSE: BCS.US) shares got a boost last Friday, when the bank announced that the current chairman of Aviva, John McFarlane, will be Barclays’ next chairman.
Mr McFarlane’s achievements at Aviva, where he kick-started a turnaround that has seen the insurer’s share price rise by 60% in eighteen months, suggests to me that he might be the right person to sort out Barclays’ lingering issues.
However, Mr McFarlane’s appointment alone is not enough to make Barclays a buy: the numbers need to be right, too.
Valuation
Let’s start with the basics: how is Barclays valued against its past earnings, and the market’s expectations of future earnings?
|
P/E ratio |
Current value |
|
P/E using 5-year average adjusted earnings per share |
15.6 |
|
2-year average forecast P/E |
9.5 |
Source: Company reports, consensus forecasts
The last couple of years have been poor for Barclays, pushing up its five-year average P/E to 15.6.
However, analysts’ forecasts for 2014 and 2015 suggest that the bank’s earnings may return to more normal levels — and that Barclays’ shares look quite cheap at today’s prices.
What about the fundamentals?
Is Barclays cheap for a reason? The company’s has performed poorly on key fundamental measures over the last five years:
|
Metric |
5-year compound average growth rate |
|
Total income |
-0.9% |
|
Pre-tax profit |
-9.3% |
|
Dividend |
+21% |
|
Return on equity |
-30% |
Source: Company reports
The apparent dividend growth is skewed by the fact that Barclays cut its dividend from 10.6p in 2008, to just 2.3p in 2009 — so while last year’s payout of 6.5p is a considerable improvement on the 2009 payout, it remains nearly 40% lower than the 2008 dividend.
51% upside?
However, there are another set of numbers I believe investors should consider before buying Barclays shares.
Barclays’ shares continue to trade at a significant discount to their book value, which when combined with a rising dividend yield, is a key attraction, in my view:
|
Barclays |
Value |
|
Price/book value |
0.7 |
|
Price/tangible book value |
0.82 |
|
2014 prospective yield |
3.1% |
|
2015 prospective yield |
4.3% |
These numbers tell me an attractive story: not only can I buy Barclays’ assets for less than their tangible value, but I will be paid a reasonable yield while I wait for the market to regain its trust in Barclays’ balance sheet.
If Barclays’ shares were valued at 1.25 times their tangible asset value, like Lloyds Banking Group or HSBC Holdings, Barclays share price could rise to 348p — 51% higher than today’s price of 229p.
Of course, the obvious risk here is that Barclays’ assets will turn out to be worth less than the bank believes, so the book value will fall. However, while asset impairments have been a big feature of banks’ accounting over the last five years, I believe this risk is diminishing.