I continue to see Lloyds (LSE: LLOY) as an attractive long-term investment and I’ll explain why shortly. But first, let me tell you why I believe a less familiar FTSE 100 financial firm could be an excellent choice to gallop alongside the Black Horse in a diversified portfolio.
Different strokes
Schroders (LSE: SDRC), which announced its annual results today, is ranked in the lower half of the FTSE 100. However, this 213-year old firm — still controlled by the founding family — has an antiquated capital structure of voting shares and non-voting shares. When these are aggregated, the true market capitalisation of the company is £8.33bn, which would put it in the top half of the Footsie, above such familiar names as ITV and Burberry.
Old-fashioned family firms are rather frowned upon in these days of ‘corporate governance’. But Schroders sailed through the financial crisis with the sort of strong balance sheet and responsible management that was signally lacking among many companies in the financial sector. Of course, banks are now more closely regulated — one reason why I think Lloyds is a sound investment today — but I would argue that Schroders’ imperative of prudently stewarding the business for the benefit of future generations makes it an equally attractive proposition for private investors with a long-term horizon.
Diversification
Today’s results from Schroders showed statutory profit before tax increasing by 5% and profit before tax and exceptional items by 6%. Both the asset management and wealth management divisions (about 90% and 10% of group revenue, respectively) increased their underlying profits and the board lifted the dividend for the year by 7%.
Strong investment performance, positive net inflows and strategic acquisitions led to assets under management and administration increasing 27%. We’ll have to wait for the full annual report for the latest numbers on the geographical diversification of assets under management by client domicile, but it won’t be vastly different to last year. Back then it was UK (41%), Asia Pacific (25%), Europe, Middle East and Africa (21%) and Americas (13%). I think Schroders’ considerable international business adds valuable diversification alongside UK-focused Lloyds.
Valuations
Of course, Lloyds still hasn’t fully recovered from the financial crisis but its latest results show the strength of its underlying business and best-in-class fundamentals among the big Footsie banks. Even arch-bear on banks Neil Woodford has said recently that UK banks are “more investable than they’ve been in a long time”.
The table below shows some valuation numbers for Lloyds and Schroders (both the voting shares and the non-voting shares which trade at a discount).
| Recent share price | Trailing P/E (statutory earnings) | Trailing P/E (underlying earnings) | Trailing dividend yield | |
| Lloyds | 68.7p | 23.7 | 8.5 | 4.4% |
| Schroders (voting) | 3,068p | 17.2 | 16.5 | 3.0% |
| Schroders (non-voting) | 2,230p | 12.5 | 12.0 | 4.2% |
I’ve calculated Lloyds’ underlying P/E of 8.5 using underlying profit before tax and an effective tax rate of 27% (the bank’s medium-term expectation). This might be considered generous as the actual effective tax rate for the year was 41%, but I think it gives an idea of the underlying longer-term value here. Add a starting dividend yield of 4.4% into the mix and you can see why I think Lloyds is a sound long-term investment.
I also personally rate Schroders non-voting shares a ‘buy’, based on the reasonable P/E (whether statutory or underlying) and attractive 4.2% dividend yield.
