Barclays (LSE: BARC) shares have looked seriously undervalued to me for quite a few years. The past 12 months have finally seen some big action, with the share price up 92%.
What that means is a £20,000 investment in Barclays shares a year ago would be worth £38,400 today. Add approximately £1,090 in dividends, and we’d be just a shade short of doubling.
The climb has cut the forecast dividend yield to just 2.8%. But even with that, I still think the Barclays share price looks cheap. And it seems City analysts agree, with a big majority Buy consensus out there.
Still too cheap?
There’s an average share price target on Barclays of 316p, which is 9% ahead of the 290p price as I write. Some might not see so great a potential there, especially as the target range stretches from 230p to 375p. That means at least someone out there expects Barclays shares to fall.
But looking at forecast valuations, I can see plenty of scope for further potential gains. Does an expected price-to-earnings (P/E) ratio of 8.5 sound low? It does to me, even before I check out earnings forecasts for the next two years. They could drop the P/E to not much above six by 2026.
The key weakness of Barclays, compared to other FTSE 100 banks, looks to be that low dividend yield. It might be tempting to go for Lloyds Banking Group instead, for its 4.7% yield. But Barclays is significantly more diverse, and is still big in international corprorate banking.
Remember when other banks dropped that business like a hot potato in the wake of the financial crash? Because Barclays didn’t, it could be in for a boost from the expected relaxation of banking regulations in the US. I’m wary myself, because if there’s one thing that banks never seem to do it’s learn from their mistakes. There’s got to be a risk that the drive for short-term profits could send banks rushing headlong into the next crisis.
What next?
Barclays plans to return at least £10bn to shareholders between 2024 and 2026, prefering share buybacks to dividends. At Q3 time, Barclays said it aims “to keep total dividend stable at 2023 level in absolute terms, with progressive dividend per share growth driven through share count reduction as a result of increased share buybacks.“
What do most long-term investors do with dividends? Buy more shares, right? Barclays’ approach should help keep trading costs down.
What might £20,000 invested in Barclays today turn into in 12 months from now? I don’t expect another near-doubling. And I’d never invest in the hope of making quick gains.
For those with a long-term view, Barclays does face risk from falling interest rates. Cuts have slowed in the UK and are on hold for now in the US. But when rates come down more, bank margins should drop and put pressure on profits. Still, if I didn’t already own some bank shares, I’d be considering Barclays today and think other investors might do well to do further research.
This post was originally published on Motley Fool
