Banking stocks are a favourite with UK investors and with many of the biggest names reporting their annual results at the moment, this week we asked you to vote which one you’d like to see as our Stock of the Week.
It was a fairly tight contest between three out of four of our options (with a lack of interest in Santander), but Barclays (BARC) edged ahead to win this week’s poll with 37.5% of the vote. It was a well-timed victory from the banking giant, which announced in its results on Thursday that it is resume dividend payments.
Barclays Reinstates its Dividend
Dividends are a key attraction of the financial sector for many investors. But last year the UKregulator banned the banks from paying them amid concerns about the effect of the Covid-19 pandemic on the businesses. The move may have been a prudent one but there has been criticism about the blanket nature of the ban, which applied to all banks regardless of the strength of their balance sheet. With dividends off the menu, no banks currently feature in our list of top FTSE 100 dividend-paying stocks, but an easing off the restrictions could see a return to the table for some names in the sector.
Despite profits falling 38% to £1.5 billion, Barclays’ results were better than forecast, but shares still dipped around 4% on the day, with some indicators of concern. The business has, for example, increased the amount of cash it sets aside for bad lending by more than 150% to £4.8bn, reflecting a rise in defaults.
And while the return of a dividend may be cause for celebration, some investors may have been hoping for more: shareholders will receive a payment of 1p a share, with a £700 million share buyback providing the equivalent of an additional 4p a share.
Russ Mould, investment director at AJ Bell, explains: “While allowing banks to pay dividends for the year just gone, the regulator has stipulated that any dividends for 2021 have to be accrued rather than paid out, at least until it has had a chance to reassess the position of the economy over the summer. In other words, there’s no guarantee the usual first-half dividend will be paid.”
But Morningstar analyst Niklas Kammer adds: “Crucially, the banks have the capacity to pay the maximum allowed [by the regulator] and more.” He also says that share buybacks are a better use of the money at the current share price.
The Outlook for Banking Stocks
And there are others reasons to be cheerful, says Mould. Barclays’ profits were better than expected and its balance sheet looks robust. Income for the group edged up 1% from last year to £21.8bn led by the firm’s Corporate and Investment Bank arm, where income grew 22% to £12.5bn. But the effects of national lockdowns can be seen in the consumer, cards and payments side of the business where income dropped 22% to £3.4bn due to lower credit card balances, among other factors.
Another bright spot on the horizon for UK banks is that the deadline for Payment Protection Insurance (PPI) compensation claims has now passed, which should bring down litigation costs significantly.
Shares in Barclays crashed in the market sell-off last year, falling from 181p in February to a low of 80p in April. They have since recovered to 148p. However, longer term returns have not been impressive, with investors enduring an annualised loss of 4.08% over 10 years, according to Morningstar data, compared to annualised gains of 4.86% from the FTSE 100 over the same period.
Morningstar analysts maintain the stock's three-star rating following its results, indicating that it is trading in the region of its 170p fair value estimate, which has also been maintained. The firm has no economic moat, despite having a “strong competitive position as one of the five high street banks” in the UK and also has a Very High Uncertainty Rating, owing to the likely prolonged economic recovery from the coronavirus, both in the UK and US.
What's the outlook from here? Despite the uncertainty, Morningstar Investment Management's Dan Kemp believes banks are one of the most attractive areas of the market for 2021 and feels investors have got "far too pessimistic" on the sector. He says: "These banks are likely to be producing dividends soon, but in the meantime those divdends have gone to improve the capital position of banks to make them stronger. So we see the cuts as a long-term positive."
