Can Barclays Outperform Bank of America?

Published in Investing on 20 December 2012

We compare Barclays (LSE: BARC) and Bank of America -- which stock looks better for value, income and growth?

If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100 (UKX), FTSE 250 and the US stock market.

I'm going to use three key criteria -- value, income and growth -- to compare companies to their sector peers. I've included some US shares, as these provide UK investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding US shares in a UK dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Today, I'm going to compare Barclays (LSE: BARC) (NYSE: BCS.US) with Bank of America (NYSE: BAC.US). Shares in these banks are traded on both the London and New York stock exchanges, and I have sourced all data from Morningstar, Reuters and company reports.

1. Value

The easiest way to lose money on shares is to pay too much for them -- so which bank looks better value, Barclays, or Bank of America?

ValueBarclaysBank of America
Current price-to-earnings ratio (P/E)6.431.3
Forecast P/E7.612.2
Price-to-book ratio (P/B)0.60.6
Price-to-sales ratio (P/S)1.01.4

While both banks trade at around 0.6 times their book price -- a good value indicator -- Barclays looks much cheaper, based on earnings, than Bank of America, which is still being forced to deal with the vast backlog of delinquent mortgages it inherited from its 2007 purchase of US mortgage lender Countrywide. Bank of America's forward P/E suggests that this year's results will be much better, but Barclays remains a better choice for value investors.

2. Income

With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do Barclays and Bank of America compare in terms of income?

ValueBarclaysBank of America
Current dividend yield2.3%0.4%
5-year average historical yield4.3%5.3%
5-year dividend average growth rate-27.6%-54.8%
Forecast yield2.5%0.4

Barclays wins again here -- both banks were forced to slash their dividends in 2008/9, but while Barclays' payouts are on the road to recovery and provide a meaningful yield, Bank of America's $0.04 per share payout represents little more than a nominal dividend, given that the bank's share price is over $11.

Things may improve in 2013 and analysts are predicting dividend increases from both banks, but Barclay's yield is likely to remain superior for the foreseeable future, making it a far more attractive share for income investors.

3. Growth

Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do Barclays and Bank of America shape up in terms of growth?

ValueBarclaysBank of America
5-year earnings per share growth rate-18.8%-71.8%
5-year revenue growth rate-1.1%-3.4%
5-year share price return-50.4%-73.5%

Once again, Barclays looks a more appealing prospect than its US peer Bank of America, although in this case it's not that Barclay's growth figures are good, only that Bank of America's 5-year growth record is much worse!

As things stand at the moment, Barclays appears to be closer to returning to business as usual than Bank of America, but analysts are expecting Bank of America to have returned to profit this year and to deliver major growth in profits next year, which could trigger strong gains for the bank's share price.

It's also worth noting that if the UK's economy takes a turn for the worse over the next year or so, British banks could be forced to take further writedowns on bad loans. In a recent speech, Bank of England governor Sir Mervyn King hinted that he thought many British banks had been showing unusual forbearance to borrowers in arrears so that the banks could avoid any further debt writedowns. In essence, he was suggesting that British banks' balance sheets may not be as strong as they seem.

Overall, I think it's a tie for growth -- Bank of America has more problems but perhaps also offers greater near-term growth potential, especially as the US economy appears to be growing much faster than ours. On the other hand, Barclays has already started its recovery and provides an opportunity for further steady growth, with less risk.

Should you buy Barclays or Bank of America?

For value and income investors, Barclays is undoubtedly a safer and more logical choice than Bank of America.

Growth investors may want to take a calculated risk on the US economy continuing to make a strong recovery and opt for Bank of America as a recovery play, but this bank's mortgage hangover shouldn't be underestimated. According to a recent Bloomberg report, 3.3% of Bank of America's mortgage loans are more than six months in arrears, three times as many as Citigroup, the second-biggest holder of delinquent mortgages.

Warren Buffett's UK buy

Billionaire investor Warren Buffett is known for his uncanny ability to spot a bargain and act decisively. After buying quality names at cheap prices during the financial crisis, this year he invested almost $1 billion in one of the UK's best-known blue chip brands -- a FTSE 100 giant in which Buffett now has a 5% stake.

If you'd like to know which UK company tempted the legendary investor to make a rare investment outside the US, then this free Motley Fool report has all the details. What's more, you may still be able to buy the shares Buffett bought at the price he paid! Indeed, the company in question has increased its dividend every year for 28 years and currently offers a yield of nearly 5% -- potentially making the share a very attractive long-term investment for income-seekers.

I think Warren Buffett's latest UK buy is a very appealing investment -- in fact, I own shares in the company myself. So, I'd strongly recommend you click here to download this Buffett report now, while it remains free and available.

> Roland does not own shares in any of the companies mentioned in this article.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 26 Dec 2012 , 4:32pm

"Even if your main interest is value or income investing, you do need to consider growth."

I suppose it can't hurt to consider it.

But it's a bit of a slippery slope - if you don't look out you'll find you've turned yourself into a trader or a speculator.

If you aren't one already.

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