Reason to hold

I decided to hold because I estimate that the yield (at the present price) will be 11% in 2010 and can be expected to increase in future years (till their next bout of excess risk taking and value destruction!). My calculation is shown in the spreadsheet below. It includes the following assumptions:
1 The profit after tax in 2010 will be the same as in 2007
2 The tax rate will be unchanged
3 The RCI warrants will be converted into shares in 2009
4 Dividend will be 50% of eps

Positives, negatives and unknowns

Following the new fund raising and the price having fallen to 179p, I do not know whether to sell or hold (definitely not buy!). The positives, negatives and unknowns that I can identify are:

I Positives

A Dividend resumption soon
1 Probably in 2nd half of 2009
2 Dividend rate unknown but will probably be significantly lower than dividends paid in the last 12 months because of larger number of shares in issue and high cost of borrowings

B Powerful large new shareholders may exercise better control over management

C Barclays will be among the biggest in the world for investment banking and investment management

D New Middle East shareholders may help open doors to new business in that region

E Bad news may have already been discounted

F Avoids politically motivated decisions by not resorting to government aid, e.g.
1 Not lending to small businesses that Barclays do not consider good risks
2 No curbs on expansion overseas
3 No compulsion to shrink investment banking

G Profits in 9 months to 30/9/08 slightly higher than corresponding period of previous year


II Negatives

A Very high cost of new capital suggests high perceived risk

B Management appear to have accepted the worse terms than that offered by the government in order to protect its own interests, e.g. the chairman and CEO may have been forced to resign if the government capital was accepted and the curbs on remuneration would have been unacceptable to Bob Diamond, etc

C Blatant flouting of pre-emption rights of private shareholders and even, to a large extent, of institutional shareholders

D High interest rates on new RCI’s will hamper future profitability and dividend paying ability

E Very high commissions, etc of about 4% of capital raised

III Unknown

A Do not know whether JP Morgan is being overly pessimistic when it forecasts that
1 Even after the cash injection, Barclays would still have a capital shortfall of at least £3.6 billion
2 Barclays would not be paying dividends in the foreseeable future