I reckon robust fundamentals and attractive valuations make Lloyds (LSE: LLOY), Legal & General (LSE: LGEN) and Schroders (LSE: SDR) attractive blue-chip buys right now. Of course, there’s the small matter of tomorrow’s referendum — but I’ll come to that after looking at the three businesses.
Lloyds
Lloyds’ efficiency and profits mark it out as a cut above the UK’s other big banks. Last year’s underlying return on equity of 15%, pre-tax profit of £8.1bn and earnings per share of 8.5p were impressive.
The shares have made a bit of ground this week, having been on the decline since late May, but nevertheless are 20% down from their 52-week high, putting the company on a bargain basement price-to-earnings (P/E) ratio of 8.3.
In addition to its earnings power, the Black Horse is the UK’s strongest big bank and among the strongest in Europe, with a common equity tier 1 (CET1) ratio of 13%. Last year’s stress test by the Prudential Regulation Authority — which assumed a 20% fall in house prices, a 30% crash in commercial property and unemployment peaking at over 9% — estimated Lloyds’ CET1 at 9.5% in the trough of the stress, well above the safety threshold of 4.5%.
That test — a pretty extreme scenario — assumed a suspension of Lloyds’ dividend. While I don’t see such a disaster round the corner, there could be bumps in the road that mean the dividend might not be quite as high as analyst forecasts of a 6.2% yield, rising to 7.2% next year.
Legal & General
Insurer Legal & General has a solid regulatory capital surplus and a strong business model, delivering annual earnings growth of around 10%. The shares haven’t been quite as badly hit by market jitters as Lloyds’, but are still down 17% from their 52-week high.
Legal & General now trades on a current-year forecast P/E of 11.3, falling to 10.3 for 2017. Combine these inexpensive earnings ratings with forecast dividend yields of 6.3% rising to 6.7%, and this is another strong financial business with an attractive valuation.
Schroders
Asset manager Schroders has a long history of prudent management, built on a robust balance sheet. The company culture has produced an excellent dividend record, even through the financial crisis.
The shares are down 22% from their 52-week high and trade on a P/E of 14.7 with a dividend yield of 3.3%. However, if you buy the company’s non-voting shares (ticker SDRC), which trade at a discount to the voting shares, the P/E falls to 11.1 and the yield rises to 4.4%.
Referendum
It’s widely expected that the stock market will fall on a Leave vote and rally on a Remain vote. A poll of polls in the Telegraph today has the vote split 50:50. However, the weight of money with bookmakers and betting exchanges is strongly suggesting a Remain result. As I write, the odds on Remain are around 3/10 and on Leave 3/1.
I prefer money as a predictor to opinion polls (history’s on my side), and I reckon strong businesses, such as Lloyds, L&G and Schroders, are well-worth buying today. Keeping some cash in reserve, or a bit of hedging with the bookies on Leave at 3/1, could mitigate against the vote going Brexit’s way.
