Investec expects material step-up in Barclays dividend after sale of African unit

Investec's Ian Gordon hailed Barclays's decision to dispose of the majority of its stake in its African unit, reiterating that it was the broker's preferred large-cap UK lender.

The analyst also urged the lender's directors to use its robust capital position to call its costly $2.65bn of preference shares, which carried an 8.125% coupon.

Tuesday night's divestment also underpinned his expectation for a "material step-up" in the 2018 dividend.

"We regard Barclays’ capital position as robust, and as such, it is now time to deploy that capital strength to boost earnings. Calling the prefs would “cost” c.25bps of CET1 capital, but save a £0.2bn p.a. coupon cost," the analyst said.

Overnight, Barclays said it would sell a 33.7% slice of Barclays Africa - more than had originally been expected - reducing its holding in the lender to 14.9%.

Given the current regulatory framework, that should allow it to de-consolidate the unit from its balance sheet freeing it from the requirement to hold a capital buffer equivalent to full-ownership, Gordon said.

Hence, Barclays's common equity Tier 1 ratio, the main gauge of a lenders' capital strength, would rise by 73 basis points.

Together with the disposal of its Egyptian unit, which itself would add another 10bp to its CET1 ratio, the lender's capital buffers would increase to 13.3%.

Gordon reiterated his 'buy' recommendation and 245.0p target price on the shares, pointing out how they were trading on just 0.7 times their first quarter 2017 tangible net asset value.

The latter led him to say that Barclays was Investec's preferred large-cap UK lender.