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In the past five years, Barclays (LSE: BARC) has put in an excellent performance on the stock market. Over that period, the Barclays share price has soared by 149%.
The dividend yield is 2.6%, but an investor who had bought at the lower price five years ago would now be yielding close to 6.5%.
Despite that strong share price growth, however, Barclays does not necessarily look overvalued now. The share trades on a price-to-earnings ratio of 9, lower than rivals including Lloyds and HSBC and broadly in line with NatWest.
So, is there more long-term potential for appreciation in the Barclays share price – and should I add the FTSE 100 company to my portfolio?
Solid, proven business
I do see a lot to like about Barclays.
Retail banking is often a highly profitable business. Demand is extensive and is likely to last over the long term. The business model is simple (although getting the details right can be fiendishly difficult and costly). Barclays has a strong brand, large customer base and long experience of how to run a retail bank.
Barclays has been growing this operation, for example through its acquisition of Tesco Bank. In the first quarter, the retail bank delivered income north of £2bn, an impressive year-on-year growth rate of 14%.
But – and this is where it stands out among the large listed UK banks – Barclays is a lot more than just a high street operator focused on the UK. It has an extensive international investment banking business too.
That adds a lot of volatility, but can be hugely lucrative. Indeed, in the first quarter, the investment banking operation saw income grow 16% to £3.8bn.
Not obviously overvalued
Is it a coincidence that Barclays trades on a cheaper-looking valuation than some UK rivals?
I do not think so. In fact, that has often been the case and I think there is a simple reason for it. While Barclays’ investment banking division offers the potential for bumper profits in good years, it also adds additional risks on top of those in the retail banking arm.
Investment banks are expensive to run, operate in a brutally competitive market and can see demand slump when the economy is fragile. That means their profitability can go through some wild swings.
Markets do not like volatility. Barclays’ exposure to investment banking helps explain the apparent discount its shares sell at compared to some peers.
But although such risks are real, I do not think Barclays shares look expensive given the quality of its operation. If the economy softens, I expect both parts of its operations will see income fall. That could drag down the share price.
If the economy ticks over fine, or does well, I see more good days for the company ahead. On that basis, I think the Barclays share price could rise further from here.
Personally though, the risk of the economy weakening continues to put me off buying any bank shares for now, including this one.
