Can Barclays Outperform Bank of America?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100 (UKX), FTSE 250 and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and, I feel, outweighed by the investing potential of the American market.

Today, I'm going to compare Barclays  (LSE: BARC  ) (NYSE: BCS  ) with Bank of America  (NYSE: BAC  ) . Shares in these banks are traded on both the London and New York stock exchanges, and I have sourced all data from Morningstar, Reuters, and company reports.

1. Value
The easiest way to lose money on shares is to pay too much for them -- so which bank looks better value, Barclays, or Bank of America?

Value Barclays Bank of America
Current price-to-earnings ratio (P/E) 6.4 31.3
Forecast P/E 7.6 12.2
Price-to-book ratio (P/B) 0.6 0.6
Price-to-sales ratio (P/S) 1.0 1.4

While both banks trade at around 0.6 times their book price -- a good value indicator -- Barclays looks much cheaper, based on earnings, than Bank of America, which is still being forced to deal with the vast backlog of delinquent mortgages it inherited from its 2007 purchase of U.S. mortgage lender Countrywide. Bank of America's forward P/E suggests that this year's results will be much better, but Barclays remains a better choice for value investors.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do Barclays and Bank of America compare in terms of income?

Value Barclays Bank of America
Current dividend yield 2.3% 0.4%
5-year average historical yield 4.3% 5.3%
5-year dividend average growth rate -27.6% -54.8%
Forecast yield 2.5% 0.4

Barclays wins again here -- both banks were forced to slash their dividends in 2008-09, but while Barclays' payouts are on the road to recovery and provide a meaningful yield, Bank of America's $0.04 per share payout represents little more than a nominal dividend, given that the bank's share price is over $11.

Things may improve in 2013, and analysts are predicting dividend increases from both banks, but Barclay's yield is likely to remain superior for the foreseeable future, making it a far more attractive share for income investors.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do Barclays and Bank of America shape up in terms of growth?

Value Barclays Bank of America
5-year earnings-per-share growth rate -18.8% -71.8%
5-year revenue growth rate -1.1% -3.4%
5-year share price return -50.4% -73.5%

Once again, Barclays looks like a more appealing prospect than its U.S. peer Bank of America, although in this case, it's not that Barclay's growth figures are good, only that Bank of America's five-year growth record is much worse!

As things stand at the moment, Barclays appears to be closer to returning to business as usual than Bank of America, but analysts are expecting Bank of America to have returned to profit this year and to deliver major growth in profits next year, which could trigger strong gains for the bank's share price.

It's also worth noting that if the U.K.'s economy takes a turn for the worse over the next year or so, British banks could be forced to take further writedowns on bad loans. In a recent speech, Bank of England governor Sir Mervyn King hinted that he thought many British banks had been showing unusual forbearance to borrowers in arrears so that the banks could avoid any further debt writedowns. In essence, he was suggesting that British banks' balance sheets may not be as strong as they seem.

Overall, I think it's a tie for growth -- Bank of America has more problems but perhaps also offers greater near-term growth potential, especially as the U.S. economy appears to be growing much faster than ours. On the other hand, Barclays has already started its recovery and provides an opportunity for further steady growth, with less risk.

Should you buy Barclays or Bank of America?
For value and income investors, Barclays is undoubtedly a safer and more logical choice than Bank of America.

Growth investors may want to take a calculated risk on the U.S. economy continuing to make a strong recovery and opt for Bank of America as a recovery play, but this bank's mortgage hangover shouldn't be underestimated. According to a recent Bloomberg report, 3.3% of Bank of America's mortgage loans are more than six months in arrears, three times as many as Citigroup, the second-biggest holder of delinquent mortgages.

Warren Buffett's U.K. buy
Billionaire investor Warren Buffett is known for his uncanny ability to spot a bargain and act decisively. After buying quality names at cheap prices during the financial crisis, this year he invested almost $1 billion in one of the U.K.'s best-known blue chip brands -- a FTSE 100 giant in which Buffett now has a 5% stake.

If you'd like to know which U.K. company tempted the legendary investor to make a rare investment outside the U.S., then this free Motley Fool report has all the details. What's more, you may still be able to buy the shares Buffett bought at the price he paid! Indeed, the company in question has increased its dividend every year for 28 years and currently offers a yield of nearly 5% -- potentially making the share a very attractive long-term investment for income-seekers.

I think Warren Buffett's latest U.K. buy is a very appealing investment -- in fact, I own shares in the company myself. So, I'd strongly recommend you click here to download this Buffett report now, while it remains free and available.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2012, at 12:15 AM, tomd728 wrote:

    I am looking for some commentary on the massive non-performing residential mortgage debt on BACs books.

    BAC has been reticent on the issue and very slow to

    write-off or write down. I believe the numbers here are 200-300 bb.

    Regardless of the surfeit of cheap money to BAC and the goo goo recs on this institution the mortgage write-off issue is a major block to any earnings forward...

    As an aside, Leo Mazzilo, the snake oil salesman from Country Wide, pulled off a caper that would make any major felon blush with pure envy.

    O.K. BAC got religion but what about that beast in the closet,,,,,no recourse to any agency ?

    Help me out here and thank you...

    Tom Durkin

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