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The FTSE 100 is jam-packed with progress shares. Some even commerce on rock-bottom price-to-earnings (P/E) multiples.
However this doesn’t imply I’d purchase all of them for my portfolio. Many, whereas wanting low cost on paper, may find yourself costing traders like me a fortune in the long run.
Barclays (LSE:BARC) is one such inventory I’m eager to keep away from in any respect prices.
Financial stress
Barclays has a giant benefit over UK excessive avenue rivals Lloyds and Natwest. Its important publicity to the US provides it added progress alternatives, and reduces danger by eliminating any dependence on one territory.
However I’m nonetheless not shopping for. The corporate nonetheless generates huge earnings from its house market. And this might compromise its capability to ship wholesome shareholder returns within the years forward.
Britain’s economic system continues to stagnate and elevated simply 0.1% in February. Markets celebrated indicators that the UK may very well be heading straight out of recession. But it surely means the pattern of weak financial progress drags on.
And it’s robust to see how the economic system breaks out of this sample. Large structural issues like weak productiveness, labour shortages, expertise gaps, and Brexit turbulence will take years and tonnes of political motion to resolve.
NIM danger
Retail banks like Barclays may wrestle to develop revenues on this local weather. The duty already appears like a difficult one on condition that the Financial institution of England is prone to slash rates of interest quickly. This may put internet curiosity margins (NIM) throughout the sector in a tailspin.
NIMs measure the distinction between the curiosity banks cost debtors and pay savers, and is a key indicator of profitability. At Barclays, this rose to three.13% in 2023 from 2.86% the yr earlier than due to rate of interest hikes.
Nevertheless, it slipped to three.07% throughout the fourth quarter, and was down from 3.10% from a yr earlier. It’s a metric that threatens to steadily worsen within the short-to-medium time period.
Low valuation
Metropolis analysts anticipate Barclays to extend earnings 14% in 2024. What’s extra, progress of above 20% is forecast for every of the next two years.
The financial institution is hoping {that a} restructuring drive to chop £2bn value of prices will assist earnings. However the dangers to those spectacular forecasts are excessive. It’s why Barclays shares commerce on a low P/E ratio of simply 5.9 occasions.
Dividend enhance
On a brighter notice, I anticipate Barclays shares to retain their status as a stable passive earnings supplier.
That is thanks largely to the financial institution’s robust stability sheet: its CET1 capital ratio (a measure of solvency) stood at 13.8% on the finish of 2023.
I’m additionally optimistic as a result of predicted dividends are lined between 3.5 occasions and three.9 occasions by anticipated earnings over the following two years. These figures present a large margin of security ought to earnings be blown astray.
However Barclays’ respectable dividend yields of 4.8% and 5.3% for 2024 and 2025 aren’t sufficient to encourage me to take a position.
For me, the prospect of sustained share worth weak spot makes it an unappealing FTSE share to purchase. Proper now I’d quite spend my cash on different low cost passive earnings shares.
