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.
