Should I Buy Barclays?

Published in Company Comment on 4 October 2012

Harvey Jones weighs up Barclays (LSE: BARC).

I'm ready to go shopping for shares again, but where to start? Floundering fashion giant Burberry (LSE: BRBY)? High-spirited Diageo (LSE: DGE)? Or maybe smoker's friend British American Tobacco (LSE: BATS)?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy Barclays (LSE: BARC) (NYSE: BCS.US)?

Barclays bumped

I finally lost patience with Barclays at the end of last year, and sold my stake at the lowly price of £1.85. Its share price immediately shot up nearly 40% to hit £2.57 in early March, on (forlorn) hopes of a eurozone bailout.

Timing was never my strong point.

Barclays has had a bumpy ride since then, as the road to recovery hits pothole after pothole. It stalled in early July, falling to £1.52, but has since motored back to £2.22. In these troubled times, the big banks are at the mercy of market sentiment. I regret selling Barclays in December, but should I buy it today?

This mortal coil

The big worry about investing in a global banking giants such as Barclays is that it is hard to know exactly what you are buying. Their operations are so complex, their accounts so opaque, that ordinary mortals can't take it all in.

The one thing banks have always been good at is making money. But as we know to our cost, they are also rather good at losing money, especially if it belongs to the taxpayer (and shareholders).

Risk on!

If you buy Barclays, you are buying risk. Financial risk, due to the British banking sector's exposure to Europe. Regulatory risk, as banks face one costly mis-selling scandal after another, from PPI to Libor interest-rate rigginG, which saw off chief executive Bob Diamond in July. And, of course, political risk, as politicians line up to give fat-cat bankers a crowd-pleasing kicking. None of these challenges are going away.

Barclays has a new chief executive, Antony Jenkins, said to be the 'nice guy'” of banking, who plans to transform Barclays and revive its reputation. He has a tough task ahead of him.

Being nice won't be enough on its own. Some have questioned whether Jenkins has the experience to lead such a sprawling setup, with around 150,000 employees worldwide.

It is too early to judge Jenkins, so investors are taking a punt on whether he can turn the bank around.

Lucky dip

I wouldn't buy any bank unless I planned to hold it for at least 10 years, but at least Barclays pays you to be patient, with a current yield of 2.7%.

Barclays also has a strong investment banking division, which should help drive its profits when the recovery does come. Its income grew 4% to nearly £6.5 billion in the first six months of 2012, compared to the same period last year.

And unlike part-government owned rivals Lloyds Banking Group (LSE: LLOY) Royal Bank of Scotland (LSE: RBS), you avoid the added uncertainty over when and how the government will eventually offload its stake.

Barclays has also reduced its sovereign exposures to Spain, Italy, Greece and others by 22%, to £5.6 billion. But like all the banks, it will remain at the mercy of the crisis it helped cause, so expect plenty of volatility ahead. I would buy Barclays, but only on the dips.

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> Harvey owns shares in Diageo and RBS. He doesn't hold shares in any other company mentioned in this article. The Motley Fool has recommended shares in Burberry.

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Comments

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BigJC1 04 Oct 2012 , 12:09pm

I agree with everything you say but ...... all of us need banks, they oil the wheels of commerce and their continued troubles is doing nobody any good. Banks like Barclays, Lloyds, HSBC retain a wonderful infrastructure, strong customer base and have massively (ie billions) reduced their cost base whilst adding tens of billions to their assets in particular cash. In recent times assets have been written off, provisions on mis-selling made which all mask underlying core profits.

I think 10 years is a tad long, I think within 3 to 5 years a substantial improvement will be seen (possibly a little sooner if the Tories want the good news story of making a profit, or at least a divi stream, on Lloyds pre-election).

My advice would be forget your mistake of selling when you should have been buying and instead buy now across a broad base of Barclays, Lloyds and HSBC. Turn off your screen, ignore the markets and look again in 2015.

ChancieGardener 04 Oct 2012 , 1:15pm

I snapped up a modest amount of Barclays shares at 152p in late July.

Same with RBS (at 207p), BOI (at 9 cent) and ING (at €5.80).

For sure they are all risky but for a small outlay I feel that most of them will give more than decent returns, in the long term at least, (fingers and everything else crossed!).

mackeson29 04 Oct 2012 , 1:25pm

BigJC1 - The best comment on banks & investing in them I have seen for a very, very long time.

I already have RBS & Lloyds - Sorely tempted with Barclays, Sorely tempted....

BigJC1 04 Oct 2012 , 8:39pm

Mackenson29 - Thanks, I don't have any RBS principally because they face such a huge challenge to return to their previous position and also out of all the banks they are the easiest to be turned into a state bank. But I do keep looking at them because they will gain at some point.

Barclays has the real benefit of it's investment arm which, given a moderate upturn, will be one of the few institutions with the necessary resources to grasp some very profitable situations. That could see a rapid increase in their profits.

goodlifer 04 Oct 2012 , 9:28pm

In a recent podcast David Kuo valued BARC at around 200.
If he's right now might be the time to sell, particularly as they're pretty volatile - digitallook gives them a beta of 2.26.

I bought some wayback at 143 and yielded to the temptation to take a profit.
I was just beginning to regret this when Bob Diamond hit the headlines, and I was able to sneak back in again.
!t's very tempting to try the game again.

On the other hand, if you believe the numbers - particularly the PER, the price-to-book and the dividend cover - they still look incredibly cheap.

FWIW, Iv'e banked with them for over sixty years with no real problems.
These days I do almost everything on line, but when I do visit our local branch it's always good and busy.

duffmanchon 05 Oct 2012 , 1:24pm

I would add these the next time the euro crisis kicks off again. Greece needs cash before end November so bound to be an opportunity on the horizon.

mackeson29 08 Oct 2012 , 1:39pm

duffmanchon - A man after my own heart. Thought I was the only one that liked bad Euro news that always knocks the banks down a bit - Provides a good top-up oportunity (don't always have the cash at the right time unfortunately).

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