Why Barclays PLC offers greater profit potential than Investec plc in 2017
Today's first half results from Investec(LSE: INVP) show that it is making good progress despite a challenging operating environment. The company's diversity and long term strength mean that Investec has significant long term appeal as an investment. However, Barclays(LSE: BARC) still seems to be the better buy for 2017.
Set to perform well
Investec's Asset Management and Wealth & Investment divisions benefitted from higher funds under management. A recovery in equity markets and net inflows of £1.8bn have been the major drivers of greater funds under management.
Similarly, Investec's Specialist Banking division saw operating fundamentals supported by sound levels of corporate and private client activity. Despite this, the division reported results that were less impressive than those from the same period in the prior year. This was as a result of a change in accounting policies as well as a write down on an investment in the Hong Kong portfolio.
Investec's operating profit increased by 0.7% to £281.4m, with EPS rising by 1.8% to 22.3p. Both of these growth rates were impacted by an increase in costs which reflected a planned investment in growing the client franchise business. As a result, Investec's earnings are due to rise by around 5% for the full-year. However, this is still behind the growth rate of the wider market.
As mentioned, Investec has a large amount of diversity, as well as robust finances. It looks set to perform well even if operating conditions remain challenging. In fact, in the next financial year Investec is expected to record a rise in its earnings of 17%. And with a price-to-earnings growth (PEG) ratio of 0.6, its shares could perform well in 2017.
Superior value for money
However, the wider banking and financial services industry offers a number of better opportunities than Investec. Chief among them is Barclays, which is forecast to grow its earnings by 61% in the next financial year. This puts it on a PEG ratio of 0.2, which indicates that it offers superior value for money compared to Investec.
Furthermore, Barclays has more scope to build on its high growth rate in future years. It is at the beginning of a new strategy under a new leadership team which will see it focus on improving its financial strength over the medium term. This should provide Barclays with a greater degree of financial resilience should the outlook for the global economy deteriorate. It could also cause investor sentiment towards the stock to improve as Barclays's risk profile gradually falls.
Certainly, Barclays lacks income appeal compared to Investec. Because a greater proportion of capital is being retained in order to improve its financial standing, Barclays now has a yield of just 1.4% versus 4.3% for Investec. But with Barclays's dividend being covered 3.9 times, versus 1.9 times for Investec, there is scope for higher dividends in future years. And with Barclays having a lower valuation, superior growth prospects and a better diversified business than Investec, it offers greater capital gain prospects in 2017.
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Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.