Should you be buying Lloyds Banking Group plc and BAE Systems plc today?

Bilaal Mohamed asks whether it would be wise to invest in Lloyds Banking Group plc (LON: LLOY) and BAE Systems plc (LON: BA) today?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I’ll be taking a closer look at Lloyds Banking Group (LSE: LLOY), and defence firm BAE Systems (LSE: BA). Would it be wise to invest in these two FTSE 100 companies?

Bank a bargain

Lloyds Banking Group released its first quarter trading update last week for the three months to 31 March. The group reported a 6% fall in underlying profits to £2.05bn, compared to £2.18bn for the same period a year earlier, with pre-tax profits falling by 46% to £654m, down from £1.2bn in 2015.

The has lost around 20% of its value in the past year, but analysts remain positive on the stock with a number of brokers restating their ‘buy’ recommendations in recent weeks. Market consensus expects earnings to fall by 11% to £5.4bn this year, followed by a small 2% rise to £5.5bn in 2017. This would leave Lloyds trading on just nine times forecast earnings for this year, falling to eight times for the year ending December 2017.

Lloyds offers an attractive dividend, with 4.43p per share forecast for this year, increasing to 5.16p for 2017, meaning prospective yields of 6.6% and 7.7% for the next two years. I see attractions for both value investors looking to pick up a bargain bank, and for income seekers looking for chunky dividends.

Contract win

Investors in BAE Systems received some welcome news recently as it was revealed that the defence firm had won a £15.5m contract with the US Department of Defense. BAE’s Broad Oak facility in Portsmouth will manufacture and deliver Archerfish mine neutralisers to the US Navy. The mine neutralisers are remote-controlled underwater vehicles equipped with an explosive warhead used to destroy sea mines.

The UK defence giant is expected to post an increase in revenue this year with £18.2bn forecast, compared to the £16.8bn reported in 2015, with underlying profit predicted to fall 4% to £1.2bn. Market consensus suggests a comeback next year with a 7% rise in profits to £1.3bn on higher revenue of £18.7bn. The company offers generous dividend payouts with 21.5p per share forecast for this year, increasing slightly to 22.07p for next year, meaning prospective yields of 4.5% and 4.6%, respectively.

BAE trades on 12.3 times forecast earnings for this year, falling to 11.6 times for the year ending December 2017. The shares look cheap given the low price-to-earnings ratio, but are on a par with historical levels, so I don’t see too much upside potential. However, the solid dividend yields should certainly be of interest to income seekers.

The verdict

The banks are certainly out of favour with the market at the moment, and now could be an excellent time to pick up a bargain with Lloyds. In my opinion the shares offer significant upside potential for investors seeking capital growth. Income seekers should also find the shares hard to resist with chunky dividends yielding well over 6%.

BAE Systems on the other hand look fully valued and I don’t see much in the way of capital growth. The firm offers a solid progressive dividend that could be attractive to long-term income investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »