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Barclays (LSE: BARC) shares made a habit of outpacing the FTSE 100 last year, and they’ve just done it again.
Over the last 12 months, the Barclays share price has skyrocketed 111%. Only British Airways owner IAG has done better.
At some point, the momentum has to stall. But not yet. The stock has jumped another 15% in the last month. The FTSE 100 has done well in that time, rising 5.45%. Yet Barclays delivered almost triple the return.
Can this winner continue to fly?
If an investor had put £10,000 in Barclays shares a month ago, they’d now have around £11,500. That’s a pretty solid return for a bank many had written off as a serial underperformer. So what’s been driving it?
February 2024 marked a turning point when CEO CS Venkatakrishnan launched an ambitious strategic overhaul, making the high-performing UK retail division the focal point of his growth strategy.
He also snapped up Tesco’s banking arm for £600m and launched a £2bn efficiency drive. Investors woke up.
FTSE banks have also benefitted from higher interests rates. These allow them to widen net interest margins, the difference between what they charge borrowers and pay savers.
That benefit was expected to reverse last year, with the Bank of England (BoE) expected to cut base rates five or six times in 2024. Instead, we got just a couple.
This allowed the banks to unwind their interest rate hedges in a measured way. Last year probably handed Barclays the best of all possible worlds. Especially since it largely bypassed the motor finance mis-selling scandal.
Can its good fortune continue? I’m wary. The UK economy looks sticky to me. A recession can’t be ruled out. That could force the BoE to cut rates faster than currently expected, squeezing margins.
On the plus side, lower interest rates should revive the housing market, pushing up demand for mortgages.
Barclays shares still look decent value. The price-to-earnings ratio has climbed from around seven times earnings to almost 12 times. That’s a big jump. But with earnings per share forecast to grow 12.8%, it’s not excessive. The price-to-book ratio remains a modest 0.6, suggesting the valuation is still grounded in reality.
Good value, decent yield
Another downside of the rally is that Barclays’ dividend yield has fallen to 2.6%, although that’s expected to nudge up to 3% over the next year. It’s covered 4.5 times by earnings, so watch out for extra shareholder rewards.
Barclays is a FTSE rarity as it has maintained its investment banking side. With Donald Trump in the saddle, volatility looks to be baked in. That could boost activity and fees.
The 18 analysts offering one-year share price forecasts have produced a median target of just over 322p. That’s an increase of just under 6%. Combined with the expected dividend yield, this would deliver a total return of under 10% if true. After the recent surge, a period of consolidation might be on the cards. This may be one to consider at the moment but perhaps not for anyone seeking a repeat of its outperformance.
