I used to have high hopes for Barclays (LSE: BARC) (NYSE: BCS.US). In 2013 I was looking beyond the rounds of litigation-related write-offs and general banker-bashing, and felt the bank had some quality businesses primed to capitalise on economic recovery. That included a solid position on the UK high street, the premium Barclaycard business, distinctive growth prospects in Africa and a world-class investment bank.
Bob Diamond had pulled off a coup in securing the rump of Lehman Brother’s New York operations at a bargain-basement price. The combined investment banking business had a strong position on both sides of the Atlantic and would reap the rewards as corporate activity returned to normal.
A good plan, but…
You can see where that went wrong. Barclays’ investment bank has become a millstone around its neck. There are good and bad reasons. The good reasons are the tide of dollars, pounds and now euros rolling off government printing presses, which washed away volatility in the fixed-income markets, the life-blood of Barclays’ investment banking business. I didn’t see that coming.
The bad reason is, once again, the abject failure of a UK universal bank to keep its investment bank employees in check. I should have seen that coming. Bad, dangerous practices continued, such as the controversy over ‘dark-pools’. Greedy rainmakers held CEO Antony Jenkins to ransom over their bonuses, then promptly joined Barclays’ competitors as soon as they were paid. Stuck between feeding it or floating it off, Mr Jenkins has salami-sliced the investment bank, each cut temporarily mollifying shareholders. It’s a sure way to destroy value.
Now Mr Jenkins says he’s losing patience. I fear investors may lose patience with him, then there will be another change of management, yet more new strategies, and yet more treading water. So I’ve cut my losses. Barclays should eventually pull round, but the downside risk and timeframe for recovery have both increased.
20% off, for a limited time only
In contrast, I’ve increased my holding in another company whose share price is languishing. Shell (LSE: RDSB) (NYSE: RDS-B.US) has lost 20% of its value since the oil price nose-dived last July.
The pundits — none of whom saw the collapse coming — now say prices will remain depressed for some years. I wouldn’t base any investment decision on a prediction of how oil prices will perform in that timeframe. But I have two hunches: one, that any surprise will be more likely on the upside than the downside; and two, that in the long run prices will recover — and with it, Shell’s stock.
Meanwhile, the company is paying a superlative dividend: a 6.0% yield on today’s price. Whilst dividend cover may come under pressure, Shell is big and ugly enough to defend its prodigious cash flow. There are plenty of levers to protect the payout, which hasn’t been cut since 1945, including cutting capex, lowering operating costs, asset sales and capacity to borrow more.