It’s quite staggering to see how Lloyds (LSE: LLOY) shares have taken off over the past week. It’s up an eye-popping 20% as British and European Union lawmakers edged gradually towards a Brexit deal, leading to hopes that a disorderly departure from the continental trading club has been averted.
I’d advise investors to hold their horses, though. Sure, Parliamentary approval to avoid a no-deal Brexit could be sealed as soon as Saturday evening, but with the Democratic Unionist Party and hardline Tory Eurosceptics still refusing to budge it’s possible that the government won’t have the numbers to get the deal over the line.
And in Prime Minister Boris Johnson’s own words, this leaves nothing but a no-deal Brexit on the table for 31 October.
Brexit uncertainty to reign
It’s also worth bearing in mind that, under all Brexit scenarios – whether that be the softest option (like a ‘Norway’ withdrawal) or a cliff-edge exit – the UK economy still stands to be worse off than if it remains a member of the European Union. And it’s anyone’s guess as to how long the economic impact of pulling out of the block will take to level off.
Added to this, the Brexit-related uncertainty that has been smacking the domestic economy (and thus trading at Lloyds) over the past couple of years isn’t about to disappear just because London and Brussels have concocted a fresh deal.
Negotiating the terms of departure will have been the easiest part of the Brexit process; the next step involves the UK embarking on tense trade deal negotiations with the rest of the world, a process that would likely take years to complete.
So forgive me for my scepticism but I remain less than tempted to join the pack and buy Lloyds stock today. Not even its ultra-low forward price-to-earnings ratio of 8.5 times and bulging 5.5% corresponding dividend yield are attractive.
In my eyes those colossal gains of the past week leave it susceptible of severe share price weakness in the near-term and beyond. And possibly sooner rather than later should it decide to reduce dividends.
The 6%+ dividend yield
WPP (LSE: WPP) hasn’t exactly had things its own way in recent times but it’s a dividend share I’d much rather buy than Lloyds.
While the Black Horse Bank still appears to be on the way down as bad loans rise and revenues reverse, advertising colossus WPP is showing some serious green shoots of recovery. Okay, the business reported a 0.6% drop in like-for-like sales for the first half in August on the back of legacy issues, but the overall revenues picture was better than most had expected.
Its decision to knuckle down on the creative aspect of the ad business, to embrace new technology, and to provide a more integrated service is clearly creating blinding results, both in terms of winning new business and retaining existing clients. And I reckon this may be illustrated again in third-quarter financials scheduled for Thursday 25 October, making now a great time to buy.
One final thing: at current prices, WPP also trades on a sub-10 forward P/E ratio of 9.2 times, while it also beats Lloyds in terms of dividend yields with a reading of 6.5%. All things considered I reckon it’s a much better buy than the FTSE 100 bank.
