This earnings season has one underlying theme for FTSE 100 companies, and that is ongoing recovery. If last quarter was the first such to show a bounce back since the pandemic started, the first half of 2021 is turning out to be one where profits have stayed strong, dividends have improved further, and share buybacks have happened.
To me, these trends point in one direction, and that is stock market buoyancy and a rise in share prices. These are supported by improving macroeconomic conditions that will drive demand for FTSE 100 companies’ goods and services. These include banks, which have seen robust results. Like Barclays (LSE: BARC).
Barclays reports jump in profits
Yesterday, the bank reported a 264% increase in profit after tax in the first half of 2021, compared to the same time last year. This was driven by the change in credit impairment numbers. While the first half last year saw a huge impairment charge, there was actually a release this year.
With a strong net income, the bank has decided to pay a dividend of 2p per share. While its dividend yield is still quite low, Barclays has not been much of an income stock for a long time. Still, if I already hold its shares, I do not mind a bit of extra gains from dividends. Its share price can rise as well, as it too undertakes its share buyback
The fine print and the macros
However, I see at least a couple of weaknesses with the Barclays report. Its income from business activity has actually fallen marginally because of a decline in net interest income. Its fee and commission income has risen just a tad. This can change, of course, as the economy picks up even more.
While we wait, we know that impairments will cease to be such a big mover for its net income a few months from now. Will its interest and fee income have picked up by then?
Also, its outlook is quite cautious. The bank points out that “Whilst the macroeconomic environment has improved, the outlook remains uncertain and subject to change depending on the evolution and persistence of the COVID-19 pandemic”.
Would I buy the Barclays stock?
From an overall perspective, Barclays clearly has both positives and negatives, both of which could play out fully in the next few months. I think the share price could rise because of a good first half of the year, dividends, buybacks, and an improving macro-economic environment can spur recovery in lending.
At the same time I am not sure if its future will look rosy. Ideally, it should not depend only on impairment charges and releases to show a healthy net profit. Inflation can put upward pressure on interest rates as well, which is not good for the bank’s loan growth.
I still think the stock can rise though. In price-to-earnings (P/E) terms, it is far more competitively priced than other banks, with a ratio of six times. So if I really want to buy a bank stock, it can be Barclays.