I think it only really makes sense to pick and invest in individual shares if you believe the total return from your investment will outperform the wider market. If you don’t believe that, what’s the point? You may as well save on transaction costs and spare yourself all the work and time that researching and monitoring your selections entails by putting your money in a low-cost, passive index tracker fund.
If you pick a tracker that automatically reinvests the dividends, compounding will kick in and, over time, your investment will probably do well. It could even beat the returns from many of the managed funds on the market today. So, if I was considering an individual company to invest in, I’d want to have a strong conviction that the investment could beat its index. Otherwise, I’d move on to another one or default to a tracker.
A few observations
When considering an investment in banking firm Barclays (LSE: BARC), I’d need to feel sure that it can beat its index over time. Barclays is in the FTSE 100 index, so I’d compare its potential against that of an FTSE 100 tracker fund. And to start things off, here are a few observations:
- The share price has been in a long-term downtrend since peaking in February 2007. I know it’s seen some big up and down moves along the way, but the overall direction has been down.
- Revenue has been in a downtrend for the past six years, which is as far back as my data source goes.
- Earnings have recovered from their post-credit-crunch lows.
- The dividend is back to its 2012 level after falling to less than half that during 2016 and 2017. City analysts forecast that the payout will rise further in the current trading year.
- The valuation looks low based on the price-to-earnings rating and on the price-to-book rating.
- With the share price near 163p, the dividend yield looks high, at close to 5% for 2019.
- Barclays operates an out-and-out cyclical business and its fortunes tend to ebb and flow in accordance with the prevailing general economic conditions.
This what I’d do
I don’t believe the performance of Barclays will outpace the wider market over the long haul. The cyclicality of the sector makes outcomes uncertain and I don’t expect the firm to do very well if we’re hit by a severe downturn in the economy. I reckon the declining trends in the share price, revenue and the valuation are a cause for concern. Meanwhile, rising earnings and dividend payments can only go so far and those trends could reverse if a slowdown arrives.
For those reasons, I wouldn’t risk a dividend-led investment in Barclays and I reckon the valuation-compression that we are seeing is set to continue as long as earnings are on the rise, which will likely drag on any upside progress from the share price.
So I have doubts about the investment potential of Barclays and will ignore the share price and look elsewhere to invest, such as in another company, or in an FTSE 100 tracker fund.