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I think there’s a really interesting opportunity to buy stock in Barclays (LSE:BARC) right now. The bank announced last month it’s undergoing something of a turnaround and I’m interested to see that develop.

There’s always risk with investing in companies that are changing direction and this is no exception. But the stock looks cheap, there are capital returns on the way, and the proposed plan looks like a good one to me.

What’s the problem with Barclays?

Barclays is unique among UK banks in that it combines a retail operation with a significant investment banking division. That can be viewed either positively or negatively.

On the positive side, investment banking activity tends to thrive when interest rates are low, whereas the reverse is true of retail banking. So this could potentially make Barclays a bank for all seasons.

Alternatively, it could make it a bank that isn’t optimised for any environment. And this is the way things have turned out over the last decade, with Lloyds Banking Group consistently achieving higher returns on equity.

Barclays vs. Lloyds Return on Equity

Created at TradingView

This goes some way towards explaining why the stock trades at roughly the same level as it did five years ago. But change is afoot and I think the plan to restructure, cut costs, and focus on shareholder returns is exciting.

Change of plan

To shake off its tag as a serial underperformer, Barclays is reorganising. Going forward, it’s going to operate in four divisions: UK consumer, US consumer, UK corporate, wealth management, and investment banking.

This should give shareholders better visibility as to how different parts of the business are performing. And it reminds me of the restructuring that Citigroup – which I own in my portfolio – is currently going through.

The real boost to profitability though, is going to come from cost reductions. In order to achieve this, it’s planning to dispense with around 20% of its workforce.

Cutting costs to save cash is risky – especially in investment banking, where the biggest reductions are set to come. If Barclays scales back too much, it could struggle to maintain its position in a competitive industry. 

Shareholder returns

Shareholders ought to be mindful of the challenges with the turnaround plan Barclays is aiming at. But they should also note that the returns the bank is planning over the next few years helps limit the proposed risk.

The first is the proposal to maintain the current dividend, which yields 4.73% at today’s prices. In the context of the last decade, that’s significantly higher than it has been most of the time.

Barclays Dividend Yield 2014-24

Created at TradingView

The second is share buybacks to the value of £10bn. With the company’s market-cap currently around £25bn, that amounts to a return of almost 30% over the next three years.

Investors who buy Barclays shares today stand to receive around 45% of their investment back within three years through dividends and buybacks. That significantly limits the risk, in my view.

Investing £2,000

At today’s prices, £2,000 buys 1,182 Barclays shares. And I think the market is underestimating the potential rewards on offer from buying the shares. 

The turnaround plan is as yet unproven, but the risk looks limited to me. I’m looking at adding it to my portfolio this month.

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