Are Virgin Money Holdings (UK) PLC And BGEO Group PLC Better Buys Than Lloyds Banking Group PLC?

Should you ditch Lloyds Banking Group PLC (LON: LLOY) ahead of tomorrow’s results and pile into Virgin Money Holdings (UK) PLC (LON: VM) and BGEO Group PLC (LON: BGEO)?

| 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.

With shares in Lloyds (LSE: LLOY) falling by 5% in the last month at the same time as the FTSE 100 has risen by 3%, it’s understandable that the bank’s investors are feeling frustrated with its performance. After all, most stocks have performed relatively well in recent weeks and yet Lloyds has continued the run that has seen its valuation decline by 19% in the last year.

At the same time, other banks are faring much better. For example, Virgin Money (LSE: VM) has risen by 4.5% in the last month and BGEO (LSE: BGEO) is up by over 10% during the same time period. As such, buying those two stocks would have been a sound short-term move.

What’s the alternative?

Looking further ahead though, Lloyds continues to offer excellent capital gain prospects. A key reason for this is its low valuation, with its shares currently trading on a price-to-earnings (P/E) ratio of 7.5. This indicates tremendous upside potential, while the bank’s yield of 5.9% indicates that it’s set to become an income favourite among dividend-seeking investors. This has the scope to push its share price higher and to reverse its lacklustre performance of recent months.

On both of these fronts, Lloyds is superior to Virgin Money and BGEO. In the case of the former, it trades on a P/E ratio of 13.2 which, while not high, offers less upward rerating potential than Lloyds. And with it yielding just 1.3%, Virgin Money remains a rather unappealing income play – in the short term at least.

Similarly, BGEO trades on a P/E ratio of 9.1, which is also higher than Lloyds’ rating. On the dividend front BGEO offers a yield of 4.4% which, while highly appealing, is less so than Lloyds at the present time.

Future growth

However, where BGEO and Virgin Money add real value compared to Lloyds is with regard to their growth prospects. While Lloyds is forecast to post a fall in its earnings of 8% in 2016, Virgin Money and BGEO are expected to deliver rises in their bottom lines of 33% and 24%, respectively. And when these figures are combined with their P/E ratios, they equate to price-to-earnings growth (PEG) ratios of only 0.4 for both stocks. This indicates that they offer growth at a very reasonable price and could continue to offer excellent capital gains following their share price rises of the last month.

Despite this, Lloyds still appears to have a superior risk/reward ratio. Certainly, its growth rate may be lower, but its shares are cheaper, have a higher yield and perhaps most importantly, Lloyds has a size and scale advantage over Virgin Money and BGEO. This means that if economic conditions worsen and default rates rise, Lloyds appears to have the strongest balance sheet through which to cope. Therefore, while Virgin Money and BGEO may be worth buying, Lloyds seems to be the preferred option – especially given the challenging outlook for the world economy.

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.

Peter Stephens owns shares of Lloyds Banking Group. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

Do record revenues and profits mean investors should pay more attention to the Halma share price?

A P/E ratio of 37 might put some investors off the Halma share price without a second look. But impressive…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

As BAE Systems’ share price heads towards £14, is there any value left in it?

BAE Systems’ share price has soared since Russia invaded Ukraine, but it still looks very undervalued and has great growth…

Read more »

Bronze bull and bear figurines
Investing Articles

Which is the better bank buy right now: Lloyds shares or HSBC?

HSBC pays a much higher yield than Lloyds shares, has much more value left in its share price, and doesn't…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

At 231p, is there value in the Legal & General share price? Here’s what the charts say!

Here, this Fool delves deeper into Legal & General to see if its current share price is the bargain it…

Read more »

Investing Articles

3 diverse FTSE stocks I’d consider buying to invest in Asia

This trio of FTSE shares could be the perfect way to invest in the fast-growing economies of Asia over the…

Read more »

many happy international football fans watching tv
Investing Articles

6.4% yield! Is ITV a dividend stock to consider buying during the Euros?

Our writer takes a look at ITV and assesses whether the FTSE 250 dividend stock might be a good fit…

Read more »

Illustration of flames over a black background
Investing Articles

Up 915% in a decade! This growth monster may also be the best FTSE income stock of the lot

Harvey Jones has been watching this top FTSE 100 growth and income stock for months and now he's found another…

Read more »

Investing Articles

The tax-free route to millionaire portfolios

• Although annual ISA subscriptions are capped, ISAs are an undoubtedly serious wealth-building tool: you can build serious wealth.

Read more »