When it comes to UK financial stocks, I think Barclays (LSE: BARC) is one of the most under-appreciated. This financial services group is a global giant with operations around the world and a world-leading credit card brand in the form of Barclaycard.
Indeed, unlike so many of its peers which rely almost entirely on the UK economy to generate their profits, Barclays has a range of overseas businesses that all contribute to its bottom line. These include its US investment bank and international lending business.
Barclays’s international business has helped the company ride out turbulence in its home market. For example, for the third quarter of 2019, Barclays UK profit before tax slumped to just £0.4bn, thanks to an additional £1.4bn provision for PPI claims. Meanwhile, profit before tax at the international business hit £3.5bn.
Despite a warning that the bank’s profit outlook for 2020 is “unquestionably more challenging now than it appeared a year ago,” in its third-quarter earnings release, Barclays is still producing an extremely attractive return.
Management is targeting a return on tangible equity — a key measure of banking profitability — of more than 10% for the year. Those are the sort of returns most European banks can only dream of making.
Still, despite these impressive returns, shares in the lender are currently dealing at a price to book ratio of less than 50%. In theory, profitable businesses should be trading at book value, implying the stock could rise 100% from current levels to hit fair value.
I think a profit of 100% could be too good to be true, but I do believe the stock is severely undervalued. It’s trading at a forward P/E of 7.8 and also supports a dividend yield of 5.5%. In my opinion, those metrics are just too good to pass up.
A profitable combination
But if you’re worried about investing in a bank, I recommend combining Barclays with the FTSE 100 in your portfolio. Over the past decade, the lead index has produced an average annual return for investors in the region of 7% with a mix of capital growth and income. Assuming earnings continue to grow in line with inflation, and the index’s dividend yield of 4.5% is here to stay, I expect this trend to continue.
At the same time, I think the Barclays share price could provide returns of up to 10% per annum through a combination of capital growth and income with its 5.5% dividend yield.
So, these figures suggest investors could see an annual return of 8.5% from a portfolio of the FTSE 100 and the Barclays share price for the foreseeable future. At this rate of return, I estimate it would take 40 years to turn a monthly contribution of £300 into a total pension pot of £1m.
That’s how I think the Barclays share price and the FTSE 100 combined could help you retire a millionaire. While these returns are not guaranteed, considering the index’s past performance and Barclays’s current valuation, I think there’s a good chance these investments could hit the above returns targets for the foreseeable future.
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Rupert Hargreaves owns no share 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