Today I am explaining why I believe Barclays (LSE: BARC) (NYSE: BCS.US) could prove a shrewd value selection.
Hard work set to drive earnings skywards
Ever since the banking crisis of 2008/2009 took a hatchet to the bottom line, Barclays has been unable to resolutely pull itself clear of the subsequent financial wreckage. The consequences of battered revenues, significant write-downs and the costs of restructuring have all taken their toll during the period, and the bank has seen earnings dip in three of the past five years.
However, a strong recovery in the British economy — combined with the fruits of significant cost-cutting and accelerating ‘digitalisation’ of the business — are expected to underpin terrific growth in coming years. Indeed, City analysts expect Barclays to print earnings growth to the tune of 23% and 28% in 2014 and 2015 respectively.
As a result Barclays changes hands on a P/E rating of 11.6 times prospective earnings for this year, well below the threshold of 15 times which marks reasonable for money. And this collapses to just 9.1 times for 2015 — any reading below 10 times really is considered too good to pass up on.
In addition, Barclays’ cheapness relative to its growth potential is underlined by stunning price to earnings to growth (PEG) numbers of 0.5 and 0.3 for 2014 and 2015 correspondingly. A stock with a reading of 1 or under is considered outstanding bang for one’s buck.
Dividends poised to flip higher again
Due to the effect of wavering earnings Barclays was finally forced to bite the bullet last year and keep the full-year payout locked at 6.5p per share. But with earnings expected to head resolutely northwards in coming years, and a programme of branch closures and staff cutbacks slashing the cost base, the bank is predicted to get payouts rolling higher once again.
The City’s number crunchers expect the business to institute a slight hike in the current 12-month period, to 6.6p. But the anticipation of further profit growth in 2015, combined with additional strengthening of the balance sheet, is expected to propel the total payout 44% higher to 9.5p per share.
As a consequence Barclays’ yield surges from 2.9% this year — a respectable figure, if still lagging a forward average of 3.5% for the complete banking sector — to a much more appetising 4.1% in 2015.