Could Barclays (LSE: BARC) be considered one of the best-value stocks available on the FTSE 100 today?
City analysts are forecasting a healthy 12% earnings rise in 2020, one which leaves the business trading on a forward price-to-earnings (P/E) ratio of 7 times. This comes in well below the corresponding Footsie average of 14.5 times, and is a reading which its supporters claim more than bakes in the possibility of Brexit-related stress next year and economic cooling in the US, too.
On top of this Barclays also beats its blue-chip compatriots in the dividend stakes. For next year the bank carries a monster 5.6% yield compared with the FTSE 100 prospective average of 4.8%.
A steady slider
Just because a share offers compelling value on paper, however, it doesn’t necessarily mean it’s worthy of even a speculative punt. Barclays has long traded on sub-10, bargain-basement P/E ratios and carried big dividend yields to boot, though this hasn’t stopped the bank from falling 20% in value over the past three years.
Make no mistake: receding fears of a no-deal Brexit have benefitted a swathe of UK-focussed stocks during the past four months and Barclays was recently trading at its most expensive since last November.
The very factors that have kept the firm’s share price locked in a broad downtrend remain in place including concerns over the impact of the UK’s exit from the EU on the domestic economy in the near term and beyond, increased competition in critical areas like mortgages, or the likelihood that profits-crushing, rock-bottom interest rates are the ‘new normal.’
I wouldn’t say that I’m being overly pessimistic here, either, as the FTSE 100 company’s latest financials showed. Even stripping out the impact of an extra £1.4bn worth of PPI-related provisions in the third quarter Barclays UK saw profits continue to fall in quarter three, down 7% year on year to £1.9bn.
The bank saw income drop 2% from the corresponding 2018 period to £5.4bn as mortgage margins came under pressure and consumer borrowing weakened. Further, the Barclays UK division had to eat an extra £522m worth of impairment charges between July and September, roughly in line with the £530m it recorded a year earlier.
And if GDP growth data from the Office for National Statistics is anything to go by it looks as if Barclays will continue to struggle. The domestic economy expanded by 1% on an annual basis in the third quarter, the worst result for almost a decade.
To add insult to injury, the ONS pointed out that this year-on-year rise was “mainly thanks to a strong July” as activity ground to a halt in August and September, painting a bleak picture for the months ahead.
Barclays is cheap, sure, but it’s cheap because of its poor near-term profits outlook and serious question marks over how long it’ll take this fog to lift. There’s a galaxy of great FTSE 100 income stocks to buy today but the bank isn’t one I’d consider snapping up for even a second.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019