Today I’m looking at the Lloyds Banking Group (LSE: LLOY) share price. The FTSE 100 company has risen 7% since the end of December. And while it could add to these gains, I don’t think this is a UK share to buy today.
There are a number of reasons why the Lloyds share price doesn’t appeal to me. Sure, it might look cheap on paper. But I’m worried about:
- The possibility that low interest rates of the past decade will be here to stay. This threatens banks’ profits as it narrows the difference between the rates that they offer borrowers and savers.
- The threat of prolonged UK economic growth following Covid-19 and Brexit. This could significantly hamper profits expansion at Lloyds as it has little foreign exposure.
- The competitive dangers posed by financial technology (or fintech) companies. Digital banks like Starling Bank and money transfer company Wise, for example, threaten the long-term position of UK banking shares like Lloyds.
Cheap but risky
It’s possible that I’m being a bit too bearish towards the FTSE 100 bank. Senior Bank of England policymaker Andy Haldane has suggested rates in fact may have to rise to curb the threat of soaring inflation. Lloyds is also investing heavily in technology and cutting costs to head off the threat of the nimbler fintech challengers.
Fans of this UK banking share might also argue that these threats are reflected in the low Lloyds share price. Today the company trades on a low price-to-earnings growth (PEG) ratio of 0.1. Any reading below 1 can suggest that a firm is undervalued by traders and investors.
It’s not a UK share that I’m willing to take a chance with, though. Even if City predictions of a strong post-pandemic profits bounce materialise there are still significant long-term threats for Lloyds to head off.
A better UK share
This is why I’d much rather invest my hard-earned cash in Unilever (LSE: ULVR) instead. Even if the economy in line for a long downturn this UK share can still expect profits to keep rising.
For one, this FTSE 100 company has a gigantic geographic wingspan which negates the impact of tough economic conditions in one or two regions on group profits. It sells a broad range of essential consumer products which keep sales rolling in during good times and bad. And in terms of competition, Unilever has the sort of brand power to see off the threat that producers of generic fast-moving consumer goods (FMCG) pose.
Now Unilever’s shares don’t come cheap. This UK share trades on a forward price-to-earnings ratio of 21 times. And this puts it in danger of a sharp share price reversal if demand for its goods suddenly sinks. Studies show that traditional FMCG brands have gradually lost power during the past 10 years. Unilever will have to work hard to stop the allure of its brands from fading further.
That said, I still think there’s a lot to be excited about Unilever today. It’s why I already own the share in my own Stocks and Shares ISA. And I certainly think its earnings outlook is much more robust than that of Lloyds.
