Don't buy Barclays plc or Royal Mail plc until you read this!
Today I'll be taking a closer look at banking giant Barclays(LSE: BARC), and postal services company Royal Mail(LSE: RMG). Should you be risking your money on these FTSE 100 firms?
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Unloved bank
Multinational banking giant Barclays updated the market with a disappointing set of figures last week when it announced its first quarter results for the three months to 31 March. The group reported a massive 25% drop in pre-tax profits to £793m, down from £1.06bn for the same period a year earlier.
Despite the disappointing numbers, the outlook for Barclays is more promising. According to consensus forecasts, the City is expecting a 5% dip in earnings this year to £2.7bn, followed by a strong 40% rebound to £3.7bn next year. At current levels Barclays trades on just 10 times forecast earnings for the current year, falling to an even lower seven times for the year ending December 2017.
The shares have fallen more than 36% in the last 12 months, and in my opinion are changing hands at a bargain price, with an ultra-low forward P/E rating.
Delivering reliable income
Postal services provider Royal Mail is expected to announce its final results later this month for the full year ended March 2016. The City is expecting the group to report a 10% decline in underlying earnings to £387m, or 38.73p per share, compared to 42.8p reported last year. Analysts are however predicting a better performance for this financial year with a 3% rise in earnings, followed by a further 4% improvement for the year to March 2018.
The FTSE 100 company is also expected to increase its full-year dividends from 21p per share in 2015, to 21.72p for the year just ended, followed by further rises to 22.93p and 24.09p for fiscal 2017 and 2018. This would leave Royal Mail offering a prospective yield of 4.5% for the full year to March 2016, followed by 4.7% and 4.9% for the next two years.
So great news for income seekers, but what about investors looking for capital growth? Royal Mail currently trades on 12.2 times forecast earnings for this year, falling to just 11.8 times for the year ending March 2018. The shares have fallen 11% during the last six months, and are now looking undervalued. I can definitely see room for share price appreciation in the medium term.
The verdict
Barclay's shares look to have been oversold in this year's sell-off, and are now being traded at a bargain price. Income seekers won't find the shares appealing as the dividend yields are below 2%, but I can see significant upside potential for contrarian investors wanting to gain exposure to the unloved banking sector.
Royal Mail continues to offer solid dividends that are well covered by earnings, and remains attractive to investors seeking progressive payouts, but I think value investors should also take a look as I believe the shares are a little undervalued and have some scope for upward movement in the medium term.
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Bilaal Mohamed has no position in any shares mentioned. 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.
