Over the past five years, Barclays (LSE: BARC) has been showing an enticing dividend yield. Right now, with the share price close to 171p, the forward-looking figure for 2020 is just under 5.6%.
The prospect of chunky income from the dividend will attract many, but should you buy the shares? Looking back at the stock’s performance over the past five years is discouraging to me.
A turnaround share that hasn’t turned
I reckon a lot of investors could have been attracted to the share after its collapse in the wake of last decade’s credit-crunch, perhaps hoping for a decent recovery in the share price over time. But in December 2014, the share price stood at around 239p. Since then, it’s swung around a lot and dipped as low as about 136p in August 2019, but as I write, the price is close to 171p.
Oh dear! If I’d held the stock for the past five years, my capital would be down by 68p, which is just over 28%. And over the five-year holding period, I calculate that I would have received 25.5p in dividend payments from that generous-looking yield.
Those dividends have not been enough to save the day. Even with the dividend income added back in, I’d still be down by 42.5p, which represents a total negative return of almost 18%. My £1,000 investment would now be worth around £820. Over the past five years, Barclays has proved to be a poor investment and there could be a similar outcome for those investors holding the stock for the next five years.
One of the key takeaways for me is that the fat dividend yield has not saved the investment from losing. And neither has the low-looking valuation. Barclays’ forward-looking price-to-earnings ratio is a little over seven for 2020 and the price-to-book value has been hovering around 0.5.
Indeed, the valuation looks cheap, but is it? I don’t think so. Before considering Barclays as either a value or an income share, I reckon we should first consider it as a cyclical share. The banking sector is one of the most cyclical sectors that we have. That means profits will likely cycle up and down along with the undulations of the wider economy. And after a sustained period of high profits with Barclays, as we’ve seen in recent years, the stock market will likely keep the valuation low in anticipation of the next cyclical downturn.
To me, Barclays looks like a risky share now because if a downturn arrives, the share price will probably fall along with the firm’s profits. In 2009, for example, the share price dipped as low as about 93p. If something like that happens again, it will wipe out all the dividend income I might collect over the next five years, and then some.
Kevin Godbold has no position in any share 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.
Motley Fool UK 2019