It’s unwise to use stockbrokers’ analysts’ ratings in isolation to pick shares, but if a consensus in the City accords with our own research then it could be worth digging deeper into the situation.
Right now, City analysts mostly have a ‘buy’ rating on Barclays (LSE: BARC), Babcock International Group (LSE: BAB) and British Land Company (LSE: BLND).
A stale trade
At today’s 260p, Barclay’s share price remains below the 374p or so it bounced back to during October 2009. Anyone holding shares for the almost six years since then will surely be disappointed.
The long trade on London-listed banks looks stale to me, despite what the City braces say. My default mental investing model for banks is that they tend to be among the first shares in and first out of macro-economic slumps. Banks are cyclical to the core, so as the macro-cycle matures and we move ever closer to the next slump, I’d expect price-to-earnings (PER) ratings to gradually contract as earnings rise, and dividend yields to gradually expand, all in anticipation of the next collapse in earnings.
That’s where we are with banks right now, I reckon. Add to that situation the ongoing regulatory buffeting banks must suffer and the entire banking sector — including Barclays, of course — looks unattractive. Wake me up again after the next cyclically driven share-price plunge has happened and I might make a punt on the long for the next up-spike.
As for a buy-and-forget position in Barclays — forget it! I’m not interested because the banking industry is going through structural change in a similar way to the supermarket sector. A return to high-earning international lines of business seems unlikely, and competition for traditional banking in the home market is gathering pace. To me, it’s very hard to see what’s going on inside a bank’s business and, as such, lack of visibility is yet one more reason to avoid bank shares.
Double-digit earnings growth
Babcock describes itself as an engineering support services organisation with revenue of over £4.5bn in 2015 and an order book of c.£20bn. The firm operates in the defence, energy, telecommunications, transport and education sectors delivering support by managing assets and infrastructure; running projects and programmes; and integrating engineering expertise.
The firm’s chief executive reckons Babcock performed well last year, both organically and through acquisitions. Underlying revenue was up 27%, profit before tax up 32% and earnings per share up 10%. The man at the top puts this performance down to major contract wins and expansion of the size and scope of existing contracts. He says growth from the firm’s Marine and Technology and Support Services division was particularly compelling.
Recent acquisitions create a platform for future growth, which should see further dividend progress to build on the 10% hike the firm just announced for the payout. At today’s 1105p share price the firm trades on an earnings multiple just over 14 for year to March 2016 with the forward dividend yield running at around 2.4%. Babcock enjoys a multi-year record of double-digit earnings growth so it’s easy to see why analysts rate this share a ‘buy’.
Is now a good time to invest in property?
That’s a pertinent question to ask yourself if considering an investment in British Land. The firm is a real estate investment trust (REIT), which means it’s a closed-end investment company that owns assets related to real estate such as buildings, land and real estate securities. REITs sell on the major stock market exchanges just like common stock; however, they behave differently from ordinary stock-market listed firms because the rules of being a REIT compel the firm to return most of its earnings to investors in the form of dividends.
The share price still goes up and down according to earnings and asset values, though. To invest in a REIT such as British Land, we need to take a view on property prices. We wouldn’t want to be holding a REIT with a property-price crash on the horizon, for example. At today’s 814p share price, British Land shows a dividend yield of 3.5% and trades with a 3.5% discount to its net asset value.
