As the economic stormclouds in the UK grow ever darker, my take on FTSE 100 banking giant Barclays (LSE: BARC) is becoming less and less optimistic.
In this climate, City brokers have also been downgrading their earnings estimates since I last covered the stock in late March, a development that has come as no surprise to me as the dashboard of the British economy has moved from amber to red.
And the chaotic political situation in the UK looks set to keep the squeeze on economic conditions. Whether it's the prospect of a confused and protracted exit from the European Union, or a so-called Hard Brexit that would have catastrophic long-term consequences for the country, I'm not expecting the trading environment to get any better for the likes of Barclays.
Unlike Lloyds, Barclays can at least claim exposure to foreign climes to help it mitigate these troubles, its recent restructuring allowing it to sharpen its focus on the much-stronger US economy. Still, measures to build a transatlantic banking titan are unlikely to stop earnings growth stalling as its home market struggles along. And as a side note, I'm not convinced that Barclays' withdrawal from the bright emerging markets of Africa makes long-term sense either.
Some may claim that the bank's forward P/E ratio of 10.1 times reflects these difficulties. I would disagree however, and fully expect City forecasts -- like Barclays' share price -- to slide lower in the months ahead.
Dividend estimates look shaky
That said, many income chasers may still be attracted to the bank in the hope of impressive dividend expansion.
City analysts certainly believe Barclays has what it takes to meet its target of paying a 6.5p per share dividend in 2018, up from 3p last year. What's more, they predict that the reward will rise again next year to 8.2p. Consequently the financial giant sports bulky yields of 3.3% and 4.1% for 2018 and 2019 respectively.
However, the prospect of disappointing revenues growth causes me to doubt whether Barclays will have what it takes to dole out generous dividend hikes in the medium term or further out. And my pessimistic opinion is reinforced by Barclays' weakening balance sheet (its CET1 ratio slipped to 12.7% in March from 13.3% three months earlier) and the prospect of toughening Bank of England capital stress tests.
A superior income selection
Those scouring the Footsie index for bright dividend stocks would be better served by checking out Direct Line Insurance Group (LSE: DLG) instead, in my opinion.
Indeed, the total reward expected for 2018 at the insurer is put at 30.9p, creating a monster 8.7% yield that blows Barclays' corresponding reading clean out of the water. While a smaller 29.3p payment is predicted by City analysts for next year, this still yields a formidable 8.2%.
And like the beleaguered bank, Direct Line can also be picked up on a mega-cheap earnings multiple today, the company trading on a forward P/E ratio of just 11.4 times. This low valuation reflects the increasing competitive pressures the motor insurer is facing, but I would argue that it also undermines the fact that demand is still soaring across all of its product lines. In my opinion the business is worth a close look today.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.