UK Stocks

Good times ahead for the Barclays dividend

The Barclays dividend and share buybacks could be set to soar as Barclays shares look good for the post-Covid world.

Barclays ticks a lot of boxes. The recovery from the depths of the Covid crisis has been impressive. The bank’s capital base is strong, and unlike Lloyds and RBS, it still has a substantial investment banking arm with international exposure.

The latest results from the bank were good, but let’s go back. Comparisons with last year don’t mean an awful lot. 2020 was a terrible year, so I am more interested in the Barclays performance relative to 2019 or even 2018.

In the first half of 2021, profit after tax almost quadrupled from the same period in 2020. More encouragingly, Barclays’ profit after tax in the latest half-year period was around 70 per cent up on the same period in 2019 and quadruple the level in H1 of 2018.

It is when I look at the bank’s capital base that I feel especially encouraged. The capital tier one ratio has steadily increased in recent years. It is now at 15.1. Under the Basel III, regulation, banks are required to maintain a ratio of 10.5 per cent, so Barclays has plenty of headroom to make payments to its shareholders.

Barclays’ first half results, 2018. 2019, 2020 and 2021

  H1 2021 H12020 H12019 H12018
 Total income in £m 11,315 11,621 10,790 10,934
 Profit after tax in £m 4,220 1,159 2,469 1,015
 Total payouts per share in pence 4.9 0 3 2.5
 Equity tier 1 capital ratio in per cent 15.1 14.2 13.4 13.2

Look at the bank’s P/E ratio, and the case for buying shares in Barclays looks stronger still.

Its market cap is around £30 billion. Last year, profit after tax was £2.4 billion, that’s a 12-months trailing P/E of 12.5. But then Barclays’ profits in the first half of this year alone were £4.2 billion. Even if the second half of this year merely matches the performance in the second half of last year, the ratio is less than six. You can calculate these things in multiple ways; if you were to deduct payments to other equity instrument holders and look at attributable profit, the P/E is a little higher, but the conclusion is much the same — the Barclays P/E is low, extremely low.

As for dividends, the yield is creeping up. The latest results saw the announcement of both a dividend and share buybacks totalling 4.9p a share. That’s a dividend yield of 2.2 per cent, with the second half of this year still to follow.

Recently, an analyst at Jeffries, Joseph Dickerson, predicted that the three banks, Barclays, Lloyds and RBS, could repatriate 30 per cent of their market cap between 2021 and 2023. However, he highlighted Barclays as the pick of the bunch. “Over the next three years, we expect Barclays to be able to return over one-third of its market capitalisation,” he said.

UK economy

But the reason why I especially favour Barclays over Lloyds and RBS shares relate to slight doubts regarding the UK economy. The latest Purchasing Managers Index tracking the UK economy in August was disappointing.  There is a sense that the UK economic recovery in the third quarter of this year is slowing. The economy is still expanding but not at the pace seen earlier in 2021. Add to this growing fears regarding the Delta variant of Covid, and talk that vaccine immunity drops off quite quickly, and I am concerned that the UK economy will not be as strong in the second half of this year as previously expected.

An important part of Barclays is its international component. Barclays International includes Corporate and Investment Bank and Consumer and has offices worldwide across Europe, Asia, Australia, North America, South America (in Brazil) and Africa.

The investment bank arm also means that Barclays is less reliant on retail banking.

The combination of a good balance sheet, the prospect of significant share buybacks, and good diversification makes Barclays an interesting investment.

I am not saying make Barclays shares the only bank shares you consider, but I am saying that if income is your main investment motivation, then Barclays looks appealing indeed.

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Not Investment Advice Indie Investor is for general information use only. It must not be relied upon by readers when making (or not making) their investment decisions. If in doubt you should seek advice from a professional financial adviser.

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