Is the FTSE 100 dip an unmissable chance to buy Barclays shares at a 5% discount?
Barclays (LSE: BARC) shares are having a bad morning (17 October). Theyâre down more than 5% as I write this, around three times more than the broader FTSE 100, which has dropped 1.55%.
I wouldnât call this a crash, since that term is reserved for a 20% fall from recent highs. Itâs not even a correction, which is a 10% decline. This is a dip, and dips are part of the investing process. Anyone hoping to build long-term wealth through UK shares must learn to take them in their stride.
A dip also hands investors a chance to buy quality companies at cheaper prices. At The Motley Fool, we don’t suggest investors try to make a quick gain on a rebound. Just take advantage of the lower valuation and higher yield, to let dividends and capital growth compound from a lower base. Itâs how steady, long-term wealth is built.
This FTSE 100 bank isnât expensive
The Barclays share price has been on a strong run lately. Even after todayâs drop, itâs still up around 60% over 12 months and 272% over five years.
I tend to be cautious about chasing stocks after a rally, as thereâs always a risk the best gains have been had. Yet Barclays still looks relatively cheap, trading on a price-to-earnings ratio of 10.5 against a FTSE 100 average of 15.
Itâs also attractively priced by another key measure. The price-to-book ratio sits around 0.7, well below the benchmark level of 1 that often signals fair value. Of course, a low valuation can be taken both ways. It might suggest that the investors are reluctant to invest at higher valuations.
Barclays’ half-year results, published on 29 July, offer reassurance. Profit before tax jumped 28% to £5.2bn, while earnings per share climbed 41%. The board rewarded shareholders too, announcing a further £1bn share buyback and lifting total capital distributions for the half to £1.4bn including, up 21% year on year. The low trailing yield of 2.33% partly reflects the board preference for buybacks.
Risk and reward
Unlike rivals Lloyds and NatWest, Barclays has held on to its investment banking division. Todayâs sharper fall may reflect this greater exposure to global trading activity. But it also makes these shares potentially more rewarding in the longer run.
Profits may be squeezed if central banks accelerate interest rate cuts, as that would squeeze net interest margins, the difference between what banks pay on deposits and charge on loans.
Despite these dangers, I think the shares are still well worth considering today. The board is committed to returning capital to shareholders, and a 5% markdown on a fundamentally sound business looks tempting to me.
Some investors will be tempted to hold off and see if the stock market falls even further, making Barclays cheaper still. I can understand why they might do this. However, I’ve learned the hard way that second-guessing stock market movements in this way isn’t easy. Anybody considering Barclays should only buy with a minimum five-year view, and ideally much longer. Over such a period, the growth, buybacks and dividends should compound nicely. No guarantees though.
I’ll say something else. There are loads more top FTSE 100 stocks that suddenly look better value today. I’ll be picking my targets carefully.
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Harvey Jones has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
