During the course of 2014, Barclays (LSE: BARC) (NYSE: BCS.US) has significantly underperformed the FTSE 100. Its shares have fallen by 15%, while the FTSE 100 is down 2% year-to-date. Clearly, this is hugely disappointing for investors in the bank, with allegations of wrongdoing and PPI claims continuing to dominate headlines and hurt sentiment.
However, 2015 could see the tables turn in Barclays’ favour, and it could outperform the FTSE 100 next year. Here’s why.
Income Prospects
With the Bank of England stating recently that inflation may fall below 1%, it seems as though a low interest rate environment will dominate 2015. As such, dividend yields could become even more important to investors, since during the course of 2014 the market has been pricing in an interest rate rise in early 2015. Should this fail to materialise (which looks likely), it could increase demand for high yield stocks, as well as for companies that have the potential to increase dividends at a rapid rate.
While Barclays currently yields just 2.9%, it is expected to grow dividends at a stunning pace over the next couple of years. Indeed, next year the bank is forecast to increase dividends per share by a whopping 45%, which means that shares in Barclays could be yielding as much as 4.2% in 2015 (assuming a constant share price).
However, there could be much more to come in 2016 and beyond. That’s because Barclays has stated that it expects to pay out between 40% and 50% of profit as a dividend over the medium term. Assuming that profit flat lines after 2015 (which seems unlikely given the superb growth that is forecast in 2014 and 2015), this means that Barclays could be yielding as much as 5.2% over the medium term. Clearly, this would make Barclays a strong income play and could lead to significant share price rises.
Looking Ahead
While there is clear potential for Barclays to make share price gains and beat the FTSE 100 in 2015, sentiment will inevitably be pegged back to an extent by the ongoing probes and claims against the bank. Although disappointing for investors in the bank, they provide an opportunity to buy in at a very low valuation, as evidenced by a price to earnings (P/E) ratio of just 11.1.
Indeed, even though sentiment is rather weak at present, this could easily change in 2015 as Barclays becomes a realistic income stock for investors. As a result, shares in the bank could beat the FTSE 100 in 2015, delivering excellent returns in the process.