Despite negative headlines concerning the economy, City analysts appear to be upbeat about the prospects for banking giant Barclays (LSE: BARC).
With the share price near 171p, the forward-looking dividend yield is around 5% for 2023. And that’s after analysts have pencilled in dividend rises of around 20% for 2022 and again for 2023.
However, it’s possible for any company to miss its estimates. Nothing is certain. And the dividend record at Barclays demonstrates the firm’s cyclical vulnerability. The company reduced its shareholder dividend payments during the pandemic. But the best businesses continued paying full dividends despite the economic challenges of the time.
Sensitive to the economy
Meanwhile, bank stocks are often among the most responsive to changes in general economic conditions. If there’s the slightest inkling of an impending recession, for example, banks can be among the first to plunge. But they can also shoot higher when economic conditions improve.
And rapid movements in bank stocks can make sense. Businesses such as Barclays are tied to the health of the economy. And they often see their earnings boom or bust, depending on the financial health of their customers.
So it’s crucial for me to form an opinion about where the general economy might be heading before investing in Barclays. And I’m bullish. But I think the Barclays share price could be showing me that the overall opinion of the stock market is optimistic as well. Indeed, despite well-reported worries about the economy, Barclay’s stock has held up well in recent months.
In July’s half-year results report, chief executive CS Venkatakrishnan sounded upbeat. He said Barclays is “alert to the pressure” the rising cost of living will have on its customers.
However, the company has “a range of measures in place to help”. And, looking ahead, Venkatakrishnan expects Barclays to continue distributing “excess capital” to shareholders. One way is via rising dividends and another is through share buybacks.
Diversified operations
Meanwhile, I like the diversification in Barclays’ business. It has an investment banking operation in full swing. And its international-facing operations mean it’s less tied to the outcomes of just the UK economy than some of its competitors.
A further positive is that higher interest rates tend to be good for the profitability of banks. And base interest rates have been rising.
I’d never attempt to hold shares in a cyclical outfit such as Barclays for the long term. But the stock tempts me today while it’s below 200p. My plan would be to collect the stream of dividends while general worldwide economic conditions recover. But, of course, recovery isn’t certain. And that adds a layer of risk to holding Barclays shares now.
The stock would sit in my diversified portfolio of stocks. But I’d review the position regularly and be prepared to sell if the fundamentals deteriorate.