A Closer Look at Barclays' Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Barclays  (LSE: BARC  ) (NYSE: BCS  ) and assessing whether the company is an appetising pick for income investors.

How does Barclays' dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share 2.5p 5.5p 6p 6.5p
DPS Growth -78.3% 120% 9.1% 8.3%
Dividend Cover 9.6x 5.5x 4.6x 5.3x

Source: Barclays Company Accounts.

Barclays has managed to resume a progressive dividend policy in recent years, rebuilding shareholder payouts after declining earnings and capital-building requirements forced the bank to slash the full-year dividend from 11.5 pence in 2008. Indeed, the firm has kept dividends rolling even in times of fresh earnings over the past four years, hiking the dividend in 2011 even as earnings per share (EPS) slipped 17%.

Dividend cover has remained well above the generally regarded safety benchmark of two times prospective earnings in recent times, a critical issue considering that earnings have continued to fluctuate.

What are Barclays' dividends expected to do?

  2013 2014
FY Dividend Per Share 7.2p 9.3p
DPS Growth 10.8% 29.2%
Dividend Cover 4.9x 4.6x
Dividend Yield 2.2% 2.8%

Source: Digital Look.

City analysts expect EPS to tread 2% upwards this year before exploding 21% higher in 2014. This exciting outlook is expected to drive annual dividend growth convincingly back into double digits in the medium term, with coverage still well ahead of two times potential earnings.

Barclays revealed in April's interims that it had clocked up a 1.5 billion-pound pre-tax profit in January-March, a vast improvement from the 525 million-pound loss seen in the corresponding 2011 period. The results were helped by an excellent 11% profits increase in its key Barclays Capital investment banking division, which rose to 1.3 billion pounds, and was helped by a 1% revenues improvement and 6% fall in underlying costs.

How does Barclays' dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
Banks 3.7% 13.1
FTSE 100 3.1% 16.3

Source: Digital Look.

Barclays was recently dealing on a P/E rating of 9 for 2013, providing decent relative value based purely on earnings potential, versus both its banking peers and the broader FTSE 100. However, the company lags both groups in terms of projected dividend payments.

I strongly expect earnings at the restructured Barclays to rocket higher in coming years. On top of solid progress at Barclays Capital, the firm is also making rapid headway in the U.K. retail business as well as at its Barclaycard division. I also believe that the bank's expanding activities in the developing regions of Africa should provide exciting long-term growth possibilities.

However, even though improving earnings are likely to translate into better dividend prospects, I believe that in the meantime Barclays' below-par dividend yields mean that better income plays can be attained for those seeking juicy dividend income, even if the bank remains cheap at current prices.

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