- £927 million restructuring charge signals intent
- Upgraded profit targets for 2026, helped by cost cuts
- New divisional structure and commitment to investment bank remains firm
- Plan to return (at least) £10 billion in cash to shareholders in three years represents 40% of bank’s market capitalisation
- Stock still trades on barely half of book value
“Maybe banks are going to come back into fashion after all, if only because they start to function as cash machines rather than operate them,” says AJ Bell investment director Russ Mould. “Retail investors may be a little disappointed that the actual cash dividend is likely to remain flat at 8p a share for the next three years and that Barclays is focusing more on buybacks, where it is hard for them to participate. But private individuals will still get many of the benefits from Barclays’ share buyback plans, as net asset value per share will grow (all other things being equal), their percentage stake in the company will increase and so, therefore, will their portion of the dividend payout.
“Barclays’ plan to return £10 billion to its shareholders over three years therefore catches the eye, not least because it represents 40% of the bank’s current market capitalisation. Moreover, buying back stock at a discount to book value makes sense as a clear-cut way to value accretion and offers a far more compelling case for such a scheme than many of the programmes implemented across the FTSE 100 over the past two to three years.
“All of the FTSE 100 banks trade below book value, to suggest either the market does not believe the asset valuations, or it does not believe they can make a decent, risk-adjusted return on those assets, or a combination of the two.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Datastream data
“Helped by the buybacks, net asset value per share (NAV) is growing at Barclays and – if it can keep its nose clean and avoid any fresh litigation and conduct costs and keep loan losses to manageable levels – that might be a start in persuading investors that its shares are too cheap, especially given the bumper cash returns.
Source: Company accounts
“Granted, there are a few ‘ifs,’ ‘buts,’ ‘ands’ and ‘maybes’ involved there, especially as the Financial Conduct Authority is investigating discretionary commission arrangements (DCAs) in the car financing market and Barclays did show an increase in loan impairments in the fourth quarter of 2023, with the US credit card market an intriguing culprit there.
“Even then, the lowly valuation should help to discount any negative outcomes here and Barclays’ £927 million fourth-quarter restructuring charge, new divisional and management structure and corporate activity show it is not sitting still.
Source: Company accounts
“The bank has unveiled a range of planned acquisitions and disposals to refine its business portfolio to complement the cost-cutting programme, which helps to underpin Barclays’ increase to its target return on tangible equity to 12% from 10% and above by 2026.
Source: Company accounts. Numbers restated in 2014 and 2015.
“The buybacks mean that stated profits may not need to gallop higher for that return on tangible equity target to be met, but Barclays will need to at least maintain a high level of earnings.
“The share price may have shown no interest, owing to worries about a recession, the impact of lower interest rates on net interest margins, the volatility of the investment bank and now a possible fresh round of regulatory intervention, but profits and cash returns are almost back to the boom-time levels of 2006-07 (but without anything like such a helpful macroeconomic or market backdrop).
Source: Company accounts. Cash returns equals ordinary share dividends plus share buybacks.
“However, the share price is down by four-fifths from its early 2007 high, so investors now must decide whether the stock is simply too cheap or whether the current earnings and cash returns are unsustainable. Both views cannot really be right.”
Source: LSEG Datastream data
