The Barclays (LSE: BARC) share price has lost 5.5% over the past 12 months, while Lloyds Banking Group has gained 20%. That’s after the two dipped in response to the invasion of Ukraine, but Lloyds recovered more strongly. So should I buy?
Barclays’ weaker response to the war could well be due to its wider international business. Corporate and investment banking generates nice profits, but it also brings more risk exposure. Still, I do think Barclays shares could do well this year, and I am very tempted.
Why do I currently rate Barclays as one of the best FTSE 100 shares to buy now? Well, its 2021 full-year results were way better than I expected.
On the current Barclays share price, 2021 earnings give us a price-to-earnings multiple of under five. That looks crazy cheap to me.
Onwards and upwards?
What do I think could drive Barclays upwards over the rest of 2022? Any signs of a repeat of 2021’s cracking pre-tax profit figure of £8.4bn would certainly help.
I reckon the prospect of a new progressive dividend phase should provide impetus too. The 2021 dividend of 6p per share provides a 3.5% yield. That might not excite investors as much as some of the bigger dividends on offer.
But Barclays puts its total capital returns for the year at the equivalent of 15p per share. That includes share buybacks, which should enhance future earnings per share and dividend yields. If Barclays had handed it all back as a dividend, we’d be looking at a whopping yield of 8.8%.
I think the balance of paying sustainable progressive dividends, with short-term capital returns by way of share buybacks, provides the best long-term support for the Barclays share price. It puts Barclays firmly on my personal buy list.
Diversified business
Barclays said it’s “diversified income streams position the group well for the ongoing economic recovery and rising interest rates“. There is a downside to that, though.
Diversified international exposure leaves the bank open to a wider range of risks than, say, Lloyds. Is that why the Barclays share price looks the more undervalued?
A company needs a strong balance sheet to underpin future earnings and dividend growth. On that score, Barclays looks good to me. Regulatory changes should impact the bank’s common equity tier 1 (CET1) ratio by around 80 basis points in the current year. And the newest share buyback programme (of up to £1bn) should knock another 30 bps off it.
But with a strong 2021 CET1 of 15.1%, I have no worries there at all. That’s far higher than any of the Bank of England’s stress test targets over the past few years.
Barclays share price risk
I see the main risks coming from economic uncertainty. With oil above $100 per barrel, and UK inflation soaring, it looks like we’re in for a tough year. Though higher interest rates are good for banks, a prolonged economic squeeze could put pressure on the Barclays share price.
The progress of the war in Ukraine will also have far-reaching economic consequences. We saw how fearful financial sector investors were when it kicked off.
But I still rate Barclays as a strong candidate for my ISA.