5 reasons to buy dirt-cheap Barclays shares

While constructing a new portfolio of stocks, my wife bought shares in Barclays (LSE: BARC) in July last year. She paid 154.5p a share, which I believed to be a bargain back then. But it has surprised me how volatile they have been in over nine months of owning them.

Barclays stock soars, then slumps

At its 52-week high, the Barclays share price peaked at 198.86p on 8 March. But then a US-centred banking crisis sent financial stocks nosediving worldwide.

With 12 days, Barclays stock had collapsed to a 52-week low of 128.1p on 20 March. In other words, it crashed by more than a third (-35.6%) in under two weeks. Wow.

However, the Blue Eagle bank’s shares have since rebounded. As I write on Friday afternoon, they stand at 159.94p. This values the Big Four bank at £24.9bn.

Here’s how Barclays share have performed over seven timescales:

One day -1.3%
Five days +5.0%
One month +16.6%
Year to date +1.0%
Six months +9.2%
One year +9.3%
Five years -22.2%

Barclays shares have risen over periods ranging from five days to one year. However, they’ve lost close to a quarter of their value in five years. Note that these figures excluded cash dividends, which would add several percentage points a year to these returns.

Five reasons I’d buy Barclays shares now

Despite leaping by almost a quarter (+24.8%) from its March low, Barclays stock still looks a steal to me today. Here’s why:

1. Barclays shares have one of the lowest price-to-earnings ratio in the entire FTSE 100 index. It’s a lowly 5.4, which translates into a bumper earnings yield of 18.6%.

2. Their dividend yield of 4.5% a year is comfortably ahead of the Footsie’s yearly cash yield of around 3.7%.

3. Even better, this payout is covered a whopping 4.1 times by earnings, which seems a huge margin of safety to me.

4. Barclays’ Common Equity Tier 1 (CET1) ratio — one key measure of its financial strength — is 13.6%, well above its statutory minimum.

5. In its latest results (released yesterday), Barclays unveiled a quarterly net profit of £1.8bn, up 27% on Q1 2022’s £1.4bn. Also, its UK bank and credit-cards business are both performing better than expected.

A bumpy ride ahead for Barclays?

While things look rosy for the bank now, looking in the rear-view mirror doesn’t help to see the road ahead. And I suspect 2023 will be a much tougher year for UK banks than 2022.

First, I expect banks’ net interest margins — the spreads between lending rates and savings rates — to fall in 2023-24. This will reduce banks’ net interest income — one key source of profits.

Second, with disposable incomes squeezed hard by rising interest rates and soaring household bills, I predict much higher bad debts and loan losses for banks this year.

Conversely, what might give the Barclays share price a boost? I expect shareholders would respond favourably to higher dividends. Also, a further share buyback to replace the recently completed £500m programme should lift earnings per share over time.

Weighing up these various pros and cons, I’m still very bullish on Barclays shares today. Now if I only I had some spare cash to invest…

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