Why Barclays plc is a growth bargain I'd buy and hold for 25 years

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Barclays pin card

Stating that Barclays(LSE: BARC) is a stock which may be worth buying and holding for 25 years may sound overly optimistic at the present time. The company has experienced a massively disappointing 2017 thus far, with its share price declining by over 15% since the start of the year.

However, the company now appears to offer a potent mix of a low valuation as well as high earnings growth potential. As such, it could be a surprisingly strong growth stock for the long term. Furthermore, its dividend growth potential may also be higher than many investors realise.

Growth potential

After a period of major change, Barclays now looks set to deliver on its growth potential. It is forecast to record a rise in its bottom line of 24% in the current year, followed by further growth of 28% in the next financial year. Considering many large-cap UK-listed banks are struggling to deliver positive earnings growth at the present time, double-digit growth could be a key differentiator for the stock. This could help Barclays to outperform its sector peers over the long run.

Despite its high growth potential, the bank trades on a relatively low valuation. Using last year's earnings figure, it has a price-to-earnings (P/E) ratio of just 14.7. However, this is set to fall to as little as 9.1 providing it can deliver on its earnings growth forecasts for 2017 and 2018. With a price-to-earnings growth (PEG) ratio of 0.6, the stock appears to be exceptionally cheap when compared to its sector peers and to the wider index.

Dividend prospects

While investors in Barclays have been disappointed at the rate of dividend growth for a number of years, that situation looks set to change. Having prioritised restructuring and strengthening its financial position in recent years, the company is now set to deliver a rapid rise in shareholder payouts.

For example, in the next financial year its dividends are forecast to more than double. However, this puts its dividend coverage ratio at a still very sustainable 3.4, which suggests that there could be further dividend growth ahead. With the stock trading on a forward dividend yield of 3.2%, it appears to have a bright outlook as an income play.

More growth potential

Of course, there are other stocks which also offer double-digit earnings growth potential. Reporting on Wednesday was Breedon Group(LSE: BREE). The construction materials company delivered a positive trading update for the first 10 months of its financial year. Volumes and revenue were both ahead of last year, with the latter increasing by 56%. Volumes of aggregates increased by 47%, asphalt by 2% and concrete by 99%. Assuming normal weather conditions for the final part of the year, the company's profit figure should be in line with current expectations.

Looking ahead, Breedon is forecast to post a rise in its bottom line of 14% in each of the next two years. This follows five years of double-digit earnings growth, which shows that the company may offer relatively resilient performance. Since it trades on a PEG ratio of 1.3, it appears to offer high growth at a very reasonable price.

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Peter Stephens owns shares in Barclays. 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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