Is the Barclays share price a buy?

A stock price graph showing growth over time
A stock price graph showing growth over time

Barclays(LSE: BARC) shareholders have suffered a dreadful 12 months, seeing the value of their shares fall by 23% in 2018 — alongside similar falls for Lloyds Banking Group and Royal Bank of Scotland Group.

A dividend yield of an expected 4.2% provides a bit of a consolation, but the share price drop is still a very disappointing result — and takes the firm far below the FTSE 100‘s 12-month fall of 12%.

But just three weeks into 2019, we’re already seeing some indications that it might turn out to be a pretty good year. So far, the Barclays share price has regained 7.7%, ahead of the Footsie’s 4.7%. The other banks’ share prices have performed similarly, so could we finally be seeing the turnaround point for the banking sector?

Not safe yet

Before we get too enthusiastic, I do think the 2019 uptick in optimism could still turn dramatically gloomy again depending what happens next in the long-running sitcom that Brexit is becoming.

The Prime Minister’s overwhelming defeat in the vote on her proposed Brexit deal will have raised hopes for two things. One is the possibility that we might not leave the EU on 29 March after all, and the other is the apparently diminishing possibility of a potentially disastrous no-deal Brexit.

A no-deal scenario, if it comes about, is widely expected to hit the banks hard. But I don’t have the same pessimism as many in the markets, and the horrible Barclays share price performance in 2018 doesn’t appear to be related to the actual performance of the bank at all.

In fact, Barclays’ Q3 figures showed a 23% rise in pre-tax profit once litigation and conduct costs were stripped out, suggesting its underlying business has been doing rather well.

What stress?

November’s Bank of England stress test turned out nicely too, with the bank telling us that its minimum stressed transitional CET1 ratio, at 8.9%, “comfortably exceeded the stress test hurdle rate of 7.9%.”

Barclays also confirmed its intention to pay a 2018 dividend of 6.5p per share, subject to regulatory approval.

While the specifics of the percentages might not mean a lot to most investors, the bottom line from this, plus the rest of the recent year’s stress tests, is that Barclays and our other high-street banks are in enormously better financial shape than they were before the financial crisis.

Mismatch

The combination of a plummeting share price and an improvement in fundamental performance is leading to the former, in my opinion, getting further and further dissociated from the latter.

What that means is Barclays shares have been pushed down as far as P/E multiples of around seven. That’s only half the long-term valuation of the FTSE 100 average, and I just can’t see how that can be anything but crazily cheap.

Big dividends

Add to that the expected dividend yields, tipped to come out at 4.2% for the year just ended and to rise to 5.1% in 2019 and 5.7% in 2020, and I just can’t see Barclays shares as anything but a buy.

Full-year results for 2018 aren’t due until 21 February, and by then we’ll hopefully have seen some progress on the Brexit front. Any positive political developments, on top of results, if they’re as good as expected, could lead to the Barclays share price recovery (which might have finally started) gathering more strength.

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Alan Oscroft owns shares of Lloyds Banking Group. 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.

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