Barclays (LSE:BARC) shares have doubled in value over the past 12 months. In fact, and as a personal triumph with the banking stock now up 102%, all of my UK investments have doubled in value over the past year with the exception of Lloyds.
I think this goes to show that the UK, and the FTSE 100, can be a great place to find multibaggers.
So £5,000 invested one year ago is now worth £10,000. That’s a great return in anyone’s book. And in addition, an investor would have received a fairly juicy dividend during the period, around 5% of that original investment.
It was a no-brainer
A year ago, I was optimistic about Barclays despite the poor sentiment towards the stock. It was very much unloved. The stock had underperformed its peers, grappling with net interest margin (NIM) downgrades and SEC fines over securities errors.
Yet I believed these challenges presented a compelling buying opportunity. At just 6.9 times forward earnings, Barclays traded at a 35.8% discount to the sector average. Its price-to-earnings-to-growth (PEG) ratio of 1.39, typically a sign of overvaluation, looked appealing when factoring in a near-5% dividend yield.
For me, it was a rare blend of value, growth potential, and income, making it an attractive long-term play.
A management-propelled turnaround
Sentiment change — as it always is — has been a pivotal factor in the impressive recovery of the share price over the past year. In early 2024, the UK’s improving economic outlook and prospects of interest rate cuts began to lift investor confidence.
February also marked a turning point when CEO CS Venkatakrishnan announced a strategic overhaul, including reallocating £30bn in risk-weighted assets (RWA) to the bank’s high-performing UK retail division by 2026. This unit, which averaged a 19% return on tangible equity (RoTE) between 2021-2023, has become central to Barclays’ strategy.
The plan was further bolstered by a £600m acquisition of Tesco’s banking arm and a £2bn efficiency drive, targeting £700m in cost cuts across divisions. These bold moves rejuvenated investor sentiment, propelling the share price upward.
The rate environment conundrum
Higher interest rates are good for banks, until they’re not. I’ve heard this saying used a number of times, and it means that banks benefit from higher interest rates — allowing them to raise NIMs — until their customers start struggling and default. At which point, higher rates can become disastrous.
However, the way things have played out over the past year probably represents the best-case scenario. Interest rates have fallen slowly, allowing banks to also slowly unwind their interest rate hedging, while the UK economy has avoided — albeit narrowly — a recession.
This however, does lead me to an investment risk. Barclays‘ performance, like other UK-focused banks, typically reflects the health of the UK economy. And, informally speaking, I can’t help but feel the chancellor has well and truly screwed things up. A stagnating economy and higher National Insurance contributions could put Barclays’ customers under increasing pressure.
Personally, I’m holding my Barclays shares for the long run. I’d be tempted to add to my position, based on long-term optimism, but concentration risk is an issue given my exposure to Barclays and another UK-focused bank, Lloyds.
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James Fox has positions in Barclays Plc and 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.
