This is a good time for FTSE 100 banks. After being held back during the pandemic, this cyclical sector is more than just bouncing back. It is posting bumper results. Like in the case of Barclays (LSE: BARC), which posted its full-year earnings update for 2021 earlier today. I have long been bullish on the banking set, and after considering the broad macro picture and their latest results, I am even more so.
Barclays’ robust earnings
Let me elaborate. Barclays’ net earnings are up almost 275% from the year before at £7.2bn. Pre-tax investment banking profits have hit a new record. It has been helped by a credit impairment release. This reverses the charges set aside during the pandemic for fear of a rise in bad loans. Barclays’ dividends are also now at 6p per share, up significantly from 1p during 2020, as banks are free to set their dividends. The bank’s dividend yield is still low though, at 3%, even lower than the 3.5% seen for the FTSE 100 index as a whole.
Why so undervalued?
I am, however, optimistic that dividends could improve in 2022. That could be a nice addition to the potentially significant capital growth I expect from Barclays stock this year. After its latest results, the bank’s price-to-earnings (P/E) ratio is at a low 5.3 times, which makes it a hugely undervalued stock in my view. The FTSE 100 P/E stands at 16 times right now, which would be one indication of how low its priced. It can be argued that banks have a low P/E because of limited growth potential. That is possible, but I still think that Barclays is undervalued. This is because even among its peers, it has the lowest earnings ratio.
Bullish about Barclays stock
And the fact that its earnings are expected to increase in 2022 indicates that the case for a rally in the Barclays share price just became more convincing. No wonder then that its share price is popping today. When I checked last, this Wednesday afternoon, it was trading 3% higher than its last close. It is also the third biggest FTSE 100 gainer today so far. Also, I like that analysts are really bullish on it. Even the most pessimistic analysts expect a small increase in its share price this year, and the most optimistic ones actually see a 75% increase as per estimates compiled by the Financial Times. These could change according to evolving circumstances, of course, but they are indicative of the stock’s potential for now.
What I’d do
Sounds like a fairytale investment, does it not? Well, what is one without some dragons to slay! Inflation, in particular, is a concern. It is true that the bank benefits from rising prices that result in rising interest rates as the economic recovery creates greater demand. But its costs are expected to rise too. Moreover, too much inflation is never good for growth and banks. So I’d look out for that. On balance though, Barclays stock look really good to me. I’d buy it now.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.
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