FTSE 100 stalwart Barclays (LSE: BARC) has been the worst-performing UK banking share so far this year. Barclays’ share price has dropped nearly 25% since the market closed on New Year’s Eve.
I’ve been following this situation with interest. Barclays shares now offer a forecast dividend yield of more than 5%. I reckon this could be a sign that the bank is starting to look like a bargain buy. For this reason, I’m considering adding the stock to my portfolio.
What’s wrong with Barclays’ share price?
Barclays stock has been trending lower since January as fears of a UK recession have grown. A recession could mean a slump in new lending and an increase in bad debt levels, putting pressure on the bank’s profits.
I think that the market may also be pricing in lower profits from Barclays’ investment bank. This division profited from extra corporate fundraising activity during the pandemic.
However, I think it’s worth keeping this risk in perspective. Barclays been in business for nearly 300 years. It’s survived many difficult periods before.
Although earnings are expected to fall this year, Barclays is still expected to report an after-tax profit of around £4.2bn.
Is the current share price a fair reflection of the risks and rewards on offer here? I don’t think so.
Why I’m bullish
The latest consensus forecasts from City analysts price Barclays’ shares on just 5.5 times 2022 earnings.
This low multiple means the stock is also trading at a hefty 50% discount to its tangible book value of 292p per share. (That’s the theoretical liquidation value of the bank’s assets.)
Barclays’ shares also offer a useful forecast dividend yield of 5.4% — well above the 4% average for the FTSE 100.
Although the bank does face some risks, I think these are already reflected in the low share price.
In my view, Barclays looks cheap. More importantly, I think there are some good reasons to think that the bank’s performance will improve over the next couple of years.
Barclays shares: I’d buy at this price
Low rates and tough competition have limited the profitability of Barclays lending since 2009. But I think that situation is changing.
The Bank of England has now increased interest rates three times since December. Admittedly, the base rate remains very low at 0.75%. But the trend is upward, something we’ve not seen in more than a decade. I think this is likely to give lenders the opportunity to reclaim some of their lending margin.
City analysts seem to share my view. The latest earnings forecasts for Barclays suggest that return on equity — a key measure of profitability — will improve over the next couple of years.
This is expected to translate into earnings growth of 7% in 2023 and 5% in 2024. Barclays’ dividend is forecast to rise by more than 10% in each of these years.
If the bank delivers on these forecasts, I think we’ll see the shares re-rate towards their net asset value of 292p.
Potentially, I reckon Barclays could even be a double bagger over the long term. I’d certainly be happy to buy the shares at current levels.