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The Barclays (LSE: BARC) share price is recovering to where it was pre-pandemic. Over the last 12 months, the shares are up 90%. However, despite the rise, I think it’s still quite cheap. Especially versus other FTSE 100 banks. It could also be a great recovery stock. That’s why I’m asking: is it a buying opportunity and worth adding to my portfolio?
Attractions of the Barclays share price
I’d say that looking at the P/E ratio as a measure of value, Barclays is cheaper than broadly comparable banks like Lloyds and HSBC, even though a recent share price rise has pushed the ratio up to around 20. For Lloyds the P/E is 35, for HSBC it’s 30.
When you also consider there’s a price/book ratio of 0.42, which is low to start with and also lower than the 10-year average, then the shares look very cheap to me. As such the bank’s shares have the kind of margin of safety that a value investor like Warren Buffett would lean towards.
Beyond the cheapness of the shares, there’s the bigger picture. The UK economy is likely to recover, which will help the banks. Barclays’ earnings are likely to bounce back. On a similar note, that also means there should be a recovery in margins, which were squeezed in 2020 because of the virus.
On top of the above, share buybacks may indicate management thinks the shares are undervalued. Management is using cash to do this instead of paying a higher dividend, indicating they think it’s a better use of funds.
I also like the robust-looking balance sheet, with regulatory capital well above the minimum requirement.
Lastly, on the positive front, Barclays intends to pay a progressive dividend, so we could expect a rising dividend. I think that’s good and indicates the shares could offer both income and growth to investors.
The possible downsides
It’s not all positive though. I think there are some factors that could hold the share price back, or pose potential risks.
For one, the investment bank part of the business adds risk and ties up capital. There’s also the question of whether its good performance in the recent can be repeated going forward. Investment banking is inherently volatile, so it’s far from guaranteed.
Also, investment banking in particular relies on highly skilled individuals, Barclays could lose key talent to other banks or financial institutions. That could hit the performance of its investment banking arm.
On the retail banking side of things, bad debts could be worse than management expects or has warned investors to expect. That would likely see the share price fall as I think investors expect 2021 to be a year of recovery, especially for banks.
Some would be tempted to argue that there’s an existential threat from fintech. I’m less convinced by this, but as technology develops, investors will need to keep an eye on how it alters the bank’s business model.
Lastly, the prospect of negative interest rates, which would be bad for banks, may hold back the Barclays share price.
So is the Barclays share price cheap enough to buy? For me, yes. It’s a case of a decent company at a fair price, which could be a good basis for adding it to my portfolio in the coming months.
The post The Barclays share price is cheap. Should I buy now? appeared first on The Motley Fool UK.
Andy Ross owns no share mentioned. The Motley Fool UK has recommended Barclays, Lloyds Banking Group and HSBC Holdings. 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 2021