Why Barclays plc is one of my top buys for a FTSE 100 starter portfolio

Barclays signage

Since the financial crisis, Barclays (LSE: BARC) has struggled to get back up on its own two feet. Even as the bank’s peers push ahead, thanks to problems on the group’s balance sheet, and poor returns from its investment bank, Barclays has floundered.

However, after nearly a decade of poor returns it now looks as if the bank is finally starting to become investable again, even though legacy issues continue.

Strong results 

Today it reported results for the first half of 2017, showing progress on all fronts. Group pre-tax profit increased 13% to £2.3bn thanks to lower losses at the non-core business of £647m. Core profit before tax fell 25% thanks to another provision for PPI redress. That cost the company £700m reducing core profit to just under £3bn. Core profit also benefitted from a £615m gain on the disposal of Barclays’ Visa Europe share in 2016 so this year’s numbers were always going to be lower than last year’s inflated figures. 

As well as the additional provisions for PPI, Barclays also suffered a loss after tax from discontinued operations of £2.2bn including an impairment of the group’s holding in Barclays Africa and a loss of £1.4bn on the sale of 33.7% of Barclays Africa issued share capital. The tier one equity capital ratio increased to 13.1%.

Underlying strength 

While the group has reported a headline loss of 6.6p per share today, excluding the one-off negatives such as PPI provisions and the Barclays Africa sale, earnings per share for the period were 11.8p. 

And as the recovery continues, there’s a tremendous opportunity for investors to profit. Indeed, management is still trying to reduce the cost-to-income ratio to less than 60%, from today’s 70%. If the bank can achieve earnings per share of 11.8p before nasties today, the shares could surge higher if the group lowers costs further and improves returns.

For the full year 2018, analysts have pencilled in earnings per share of 22.5p, but this could be a conservative estimate based on today’s figures. Based on these numbers, shares in the bank trade at a 2018 P/E of 9.3 which looks exceptionally cheap considering the growth potential.

This is why Barclays is one of my top picks for a FTSE 100 starter portfolio and smaller peer Virgin Money (LSE: VM) might be a great buy to hold alongside its larger peer if you’re looking for even more growth. 

Undervalued growth

Virgin may not have the same size and scale as Barclays, but the company sure has a bright growth outlook.

Unlike Barclays’ legacy issues, Virgin has no past issues to contend with so management is free to concentrate on the company’s growth. The bank is still tiny compared to the big names of UK banking so there’s an enormous market for it to grow into. And earnings should continue to expand for many years as younger consumers increasingly switch on to alternatives to the venerable names of the British high street in all aspects of their lives, from retail stores to banks.

The shares trade at a forward P/E of 8.4 and analysts expect the group to report earnings per share growth of 22% this year. Further earnings growth of 11% is expected next year, putting the shares on a 2018 P/E of 7.8. This valuation combined with the challenger bank’s explosive earnings growth might be too hard for some value and growth investors to pass up.

Future dividend champion

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More reading

Rupert Hargreaves has no position in any shares 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.

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