Banking stocks were understandably the pariahs of the investment world for a few years. But they’re far stronger now than they’ve been for decades, and yet sentiment has not recovered and there are some great bargains and attractive dividends to be had.
Lloyds
Look at Lloyds Banking Group (LSE: LLOY)(NYSE: LYG.US), for example. It’s gone from a bailed-out wreck to a bank boasting a CET1 ratio of 12.8% by the end of 2014, and returned to paying a modest dividend that year. With the shares selling for 79p now, there’s a dividend yield of 3.4% forecast for 2015. That’s not much better than the FTSE 100 average, but it would be three times covered by forecast earnings — and there’s a much bigger 5.2% predicted for 2016.
Chief executive António Horta-Osório told us that “Over the last four years we have transformed Lloyds Banking Group into a low cost, low risk, UK focused retail and commercial bank“, and to me that makes Lloyds a very attractive proposition right now. I just don’t think we’ll have many chances in the coming decades to lock in long-term dividend yields above 5% from the banking sector. On a P/E of only 10, I reckon Lloyds is undervalued.
Barclays
Barclays (LSE: BARC)(NYSE: BCS.US) is on an even lower forward P/E, of a bit under nine based on 2016 forecasts, though its expected dividend yields are a little lower than Lloyds at 3.3% this year and 4.5% next on a 256p price. I think sentiment is against Barclays more than some of the others, based on its past misdemeanours and fears that more could come out of the woodwork in the coming years and lead to further fines.
But Barclays has always seemed like one of the best at maximising shareholder returns, and that ethos is still there and seems to be better directed these days. Results for 2014 showed a rise in EPS, and we have two more years of the same forecast — and with profits rising, impairments and costs falling, and a CET1 ratio up to 10.3% (not as good as Lloyds’, but good nevertheless), I see Barclays as a bit of a steal too.
HSBC
HSBC Holdings (LSE: HSBA) is offering the best dividends of the three, if the City’s tips are accurate, with yields of 5.6% and 5.9% penciled in for this year and next, although with the shares at 600p we’re looking at a slightly higher P/E of 11.
But despite those tempting yields, HSBC surely carries more risk. It’s very high exposed to any Chinese slowdown — it hasn’t materialized yet, but it still could. And there are some observers who see HSBC as perhaps a bit too big and thinly-spread, and not as well focused in some markets as it could be.
And there’s the Switzerland issue, with HSBC’s Swiss Private Bank under investigation for alleged offences for helping well-heeled clients to avoid taxes in 2006 and 2007.
On the whole, I’m cautious about HSBC, but Lloyds and Barclays get my thumbs-up.
