It’s a good time to FTSE100 banks. After being held back during the pandemic, this cyclical sector is more than rebounding. It shows outstanding results. As in the case of Barclays (LSE: BARC), which released its full-year results update for 2021 earlier today. I have long been optimistic about the banking sector, and after reviewing the general macroeconomic situation and their latest results, I am even more so.
Barclays’ strong earnings
Let me elaborate. Barclays net profit rose nearly 275% on a year earlier to £7.2bn. Investment banking pre-tax profits hit a new high. It was helped by a release of credit impairment. This cancels charges set aside during the pandemic for fear of a rise in bad debts. Barclays dividends are also now at 6p per share, up significantly from 1p in 2020 as banks are free to set their dividends. The bank’s dividend yield, however, remains low at 3%, still below the 3.5% seen for the FTSE 100 index as a whole.
Why so undervalued?
However, I am optimistic that dividends could improve in 2022. This could be a good addition to the potentially significant capital growth I expect from Barclays shares this year. After its latest results, the bank’s price/earnings ratio (P/E) is at a low 5.3 times, making it an extremely undervalued stock in my view. The FTSE 100 P/E is currently sitting at 16 times, which would be an indication of its price weakness. It can be argued that banks have a low P/E due to limited growth potential. It’s possible, but I still think Barclays is undervalued. Indeed, even among its peers, it has the lowest win ratio.
Bullish on Barclays stock
And the fact that its profits should to augment in 2022 indicates that the case for a Barclays share price rally has become more compelling. No wonder then that its share price exploded today. When I last checked on Wednesday afternoon, it was trading 3% higher than its last close. It is also the third biggest gainer on the FTSE 100 today so far. Plus, I like that analysts are really optimistic about it. Even the most pessimistic analysts expect its share price to rise slightly this year, and the most optimistic actually see a 75% increase according to estimates compiled by the FinancialTimes. These could change as circumstances change, of course, but they’re indicative of the stock’s potential at the moment.
What I would do
Sounds like a fairy tale investment, doesn’t it? Well, what’s one without a few dragons to slay! Inflation, in particular, is of concern. It is true that the bank benefits from rising prices which translates into higher interest rates as the economic recovery creates greater demand. But its costs are also expected to rise. Moreover, too much inflation is never good for growth and banks. So I would pay attention to that. Overall though, Barclays stocks look really good to me. I would buy it now.
Manika Premsingh has no position in any of the stocks mentioned. The Motley Fool UK recommended Barclays. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.