Barclays PLC's (BCS, Financial) stock has gained an astounding 105% year to date, but this has to come to an end if you do an objective analysis.
Revenue streams
When you analyze a bank stock, you need to look at its risk via its revenue streams. Barclays generates a third of its revenue from trading activities, which is considered the most volatile of all revenue streams.
Furthermore, the British bank is faced with a negative loan environment. Banks need the interest rates and longer-term bond yields to move higher in order for them to produce excess spread on loans granted. Barclays needs the same to happen for the bond market, which it invests in. The company generates 34% of its revenue from the debt market, and another flat year in the asset class could really hurt it.
Dividend prospects
Barclays' dividend prospects aren't particularly excellent either. The stock's massive one-year gain due to excess market liquidity has caused its dividend yield to drop by 50.99% relative to its five-year average.
I personally don't see the company raising dividend payouts in the long haul; I think it's too uncertain a time for banks, which are relying on trading and interest income.
Risk-return trade-off
Even if you did want to bet on Barclays, you would really have poor odds considering the risk-return trade-off. The stock has a Sharpe ratio of 0.34, which means the risk outweighs the potential return (you would ideally like your Sharpe ratio to be above 1.00).
Financials are also cyclical in nature and although I believe the 10-year yield may be elevated next year, I don't think it's a certainty.
Other options
I thought I'd suggest a few alternatives:
- Oppenheimer Holdings Inc. (OPY, Financial) has low reliance on trading revenue and is a takeover target.
- Citigroup Inc. (C, Financial) is building on fee-based revenue and improving its asset quality under Jane Fraser. Tangible results have already been displayed via 2021's various earnings releases.
- JPMorgan Chase & Co. (JPM, Financial) produced quality results in its stress test and recently beat its third-quarter earnings estimates.
Final word
Barclays' stock is a risky asset at the moment. I'm not comfortable with its high reliance on trading revenue and the debt market. The stock's Sharpe ratio also isn't good.
