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Barclays (LSE:BARC) has been one of the standout performers in the FTSE 100 index this year, with its shares surging 35.8% year-to-date compared to a 6.2% rise for the broader index. This stellar run has understandably attracted attention from investors wondering if there’s still further potential after such gains. I’ve taken a closer look.
Still good value?
One of the most commonly used valuation methods for banks is the price-to-book (P/B) ratio. With this metric, the bank looks quite attractive with a P/B of just 0.4 times. This is noticeably lower than peers like HSBC at 0.6 times.
A P/B below 1 is generally considered undervalued for a bank. So by this measure, Barclays’ rapid share price ascent suggests there’s still room for further rises as the market potentially moves higher.
Of course, considering more than one metric is essential for good investing. Discounted cash flow analysis suggests the stock remains 32.6% undervalued compared to an estimate of fair value.
Profitability fears
However, despite the value proposition and strong market performance, there are some lingering profitability concerns. The bank’s return on equity of 7.1% trails major UK banking peers and highlights there’s plenty of room for improvement in profitability and efficiency.
Tailwinds from rising interest rates have provided a profitability boost of late. However, with interest rates expected to trend lower again, I have a few concerns about how this will impact the bank’s margins.
Management is already taking action on this risk, having recently announced a strategic cost-cutting initiative aimed at removing £2bn in annual expenses by 2026. Successful execution could provide a catalyst for improved profitability and a higher RoE, a key swing factor that would likely lift the valuation.
On the positive side, the firm is forecasting annual earnings growth around 13% for the coming years as its restructuring efforts take hold. With the wider sector only expecting growth of 0.3% in the same period, it seems like the company is doing all the right things.
The dividend
From an income perspective, Barclays does offer an appealing 3.9% dividend yield, slightly ahead of the FTSE 100 average. With a relatively low 30% payout ratio, the dividend also appears well-covered for the time being.
However, investors should be aware that the dividend track record has been somewhat unstable and bumpy compared to more established dividend payers.
Volatile… but worth it?
When considering the valuation discount, growth outlook, well-covered dividend stream, and catalysts from restructuring, I think Barclays presents a risk/reward opportunity worth considering for investors willing to stomach some volatility. To me, there’s a fairly solid margin of safety for investing at this price level, but I still feel like there might be more lucrative opportunities out there. I’ll be adding it to my watchlist for now.
