By most metrics, Barclays (LSE:BARC) shares are cheap at the moment. The company has a book value per share of £4.11 and a share price of £1.39.
In other words, investors buying the stock at today’s prices are paying 30p for every £1 in equity. That looks like a bargain, but is it too good to be true?
Book value
Right now, investors are unwilling to pay full value for the company’s equity. And there are two main reasons for this.
The first is that it’s highly unlikely that Barclays is about to liquidate its business and realise the difference between its book value and its market cap. So the discount is somewhat academic.
The second is that the market doubts that Barclays is going to be able to earn a decent return on its equity. And if that’s the case, then it doesn’t make sense to pay the full price for it.
Both of these are legitimate reasons for the company’s shares to trade at a discount. But are these concerns justified, or is there a buying opportunity here?
Liquidation
At a price-to-book (P/B) ratio of 0.3, the company could theoretically sell its assets, pay its debt, and give investors £1 for every 30p they own in shares. That’s a lower multiple than other FTSE 100 banks such as Lloyds Banking Group (0.64) and NatWest (0.53).
That would be a nice return, but it’s unlikely to happen. Partly because the company doesn’t want to cease trading, but also because it might not be able to achieve the assessed value for its assets.
Nonetheless, the discount to book value has some tangible significance. The company’s shares trading at a discount means that its share buybacks generate better value for shareholders.
The bank intends to use £750m for share buybacks. That involves using 1% of the company’s equity to cancel 3.5% of its outstanding shares, which should be a good deal for investors.
Returns
The worry about returns is probably more significant. Unlike Lloyds and NatWest, Barclays doesn’t just rely on consumer lending to generate income.
Barclays is distinctive in that it has a significant investment banking division. And while this was a good thing when interest rates were low, it has been something of a hindrance lately.
Where its rivals have seen earnings grow as a result of rising interest rates, subdued investment banking activity has offset this for Barclays. And there’s a risk this might continue.
That’s a reason for doubting that the business can earn a strong return on its equity in the near future. And it might explain why investors are pricing the company’s equity at a discount.
Is the stock a bargain?
Barclays is on my list of shares to consider buying at the moment. But despite the discount to book value, it’s not as simple as buying £1 coins for 30p.
The firm’s investment banking division has caused it to earn a lower return on equity than Lloyds or NatWest recently. But I think when interest rates start to fall this will change.
That’s why I think there’s an opportunity right now. I see the company’s investment banking division as an asset over the long term, so I’m looking to buy now while the price is low.
The post Are Barclays shares like buying £1 coins for 30p? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. 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.
