Unloved Barclays plc could still make you brilliantly rich

The great banking stock comeback keeps refusing to happen. Barclays(LSE: BARC) is losing its way again with its share price down 17% in the six months, and now trades 5% lower than five years ago. Worse, loyal investors have had little compensation in the way of a dividend: the stock currently yields just 1.59%.

Love conquers all

Investing in Barclays could be described as a labour of love, except nobody loves bankers, so what exactly is it? An article of faith, I suppose; the belief that some day, the sector will come good. I share this faith, but the question is can I justify it? Let's have a go...

Bigging up Barclays isn't easy, given the recent painful 15% drop in second quarter revenues to £5.06bn and a stinging loss of £1.4bn. This should not be happening a full decade after the financial crisis, but it is, with the bank also setting aside a £700m provision for PPI miss-selling.

Out of Africa

Yet much of this is down to legacy issues, notably the £1.4bn write down from the sale of Barclays Africa, plus a £1.1bn impairment on its holding. Excluding Africa, profit before tax actually rose 13% to £2.34bn. Also, we now finally have a deadline for filing PPI claims - 29 August 2019. Every bank investor will breathe a sigh of relief when that date is ticked off their calendars. Sadly, that isn't the end to the litigation nightmare, with the Financial Conduct Authority, Serious Fraud Office and US Department of Justice all lining up to sock it to the bank.

Another recent concern is the growing actuarial funding deficit on Barclays' main defined benefit pension scheme, which rose 31% to £7.9bn in its recently-reported triennial valuation for 2016. This will theoretically cost Barclays an extra £4.5bn over 10 years, then again, it may not. Pension deficits swing in line with gilt yields, and the gap could close by the 2019 valuation if the Bank of England follows through on recent hints and hikes interest rates.

Dividend delight

Some things are heading in the right direction. Net interest margins are rising and again, a rate hike will help, so fingers crossed for November. Barclays is holding its interim dividend at 1p, and although management did not promise future hikes, City analysts are more optimistic. The yield is currently a forecast 1.7%, but massive cover of 5.6 gives scope for rapid progression. City analysts forecast that the yield will hit 3.4% in 2018, and once it finally starts rising, I expect it to kick on from there.

There are other optimistic signs. For example, a forecast 37% rise in earnings per share this year, followed by 27% in 2018. These growth prospects are available at a forward valuation of just 10.7 times earnings. The bank's price-to-book ratio is a heavily discounted 0.5.

Just believe

It has been a long tunnel but Barclays is seeing signs of light, with its restructuring now complete. It could be a year or two before markets wake up to this fact, but long-term investors who buy at today's knock-down price should reap plenty of dividend income and capital growth rewards over the years to come. Keep the faith.

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Harvey Jones has no position in any of the shares 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.

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