Are Barclays shares the most undervalued stock in the FTSE 100?

Barclays (LSE: BARC) shares have been one of the worst-performing investments in the FTSE 100 this year. Year-to-date, the stock has fallen around 36% as concerns about the coronavirus crisis have weighed heavily on investor sentiment.

Indeed, it’s almost certain the group will face further near-term pain. However, after recent declines, Barclays shares also appear to offer a wide margin of safety, which may compensate investors for this uncertainty. 

Barclays shares on offer

It’s clear why investors have been selling Barclays shares this year. The bank was forced to suspend its dividend by regulators to preserve capital at the start of the coronavirus crisis. Management has also warned it may suffer substantial losses on its loans over the next few months. This may impact on its ability to restore the dividend in the near term. 

These concerns sent Barclays shares plunging to a level not seen since the financial crisis at the beginning of March. 

But as the world starts to recover from the coronavirus process, investor sentiment towards the lender has begun to improve. Barclays shares have increased in value by around 30% over the past three months. But, despite this performance, the stock still looks cheap.

It’s trading at a price-to-book (P/B) value of just 0.3. That’s compared to the financial services sector average of around 0.6. 

Risk vs reward

Clearly, there are still risks facing the UK economy. Barclays shares could fall further if the lender reports higher loan losses and lower profits in the near term. Nevertheless, at current levels, it would appear a lot of uncertainty is already factored into the bank’s current valuation. 

As such, the stock appears to offer a wide margin of safety at current levels and could generate high total returns for investors in the years ahead. When owned as part of a diversified portfolio, investors may be able to benefit from the bank’s recovery while minimising the risk of another setback.

Income potential

It also seems as if there’s a strong chance the group will restore its dividend soon. So far, the impact of the coronavirus on the financial system has been nowhere near as bad as expected. That has prompted calls in the financial sector to allow banks like Barclays to restore dividend payouts.

If the bank restores its dividend at the 2018 level of 6.5p per share, that suggests investors buying today would receive a dividend yield of 5.5%. 

Overall, the coronavirus crisis may not be over just yet, but green shoots are appearing. Barclays shares have, so far, failed to reflect this optimism, which suggests the stock could be an attractive acquisition at current levels.

It has the potential to deliver high total returns over the coming years, with minimal risk when owned as part of a well-diversified portfolio.