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Lloyds shares vs Deliveroo: which would I buy?

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Graph Falling Down in Front Of United Kingdom Flag
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There are two UK shares I’ve been keeping a keen eye on over the last few weeks.

One of them, Deliveroo (LSE:ROO), is a start-up success story that was at the heart of a much-publicised (and rather disastrous) IPO as it joined the London Stock Exchange at the start of April. The other, Lloyds Banking Group (LSE:LLOY), has a 300-year heritage and has been trading (in its current form) since 2009.

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But are either of these contrasting UK shares going to make it into my portfolio?

Is Deliveroo going to fix its problems?

The most worrying thing about Deliveroo is there seems to be no end in sight to its downturn. It debuted down almost 30% on its 390p IPO price. Now, it sits around 232p – a 40% decrease.

There are many reasons why the shares are performing poorly. Most obvious is the fact that Deliveroo had benefited from people being unable to leave their homes. With lockdown easing, we’ll likely see UK shares centred on hospitality soar as the demand for home delivery lessens.

On top of that, it was simply overvalued. It isn’t currently profitable and has major competitors in two other UK shares, Just Eat and Uber Eats, so there’s no economic ‘moat’ here. In fact, the only unique feature at present seems to come from the poor conditions for its riders.

I feel its paths towards rapid growth are mostly hypothetical: one of its competitors leaving the UK, signing up restaurants exclusively, or even another lockdown. Without any of these, I’m not hopeful that its shares can leap ahead fast. 

Its Q1 trading update did offer some positivity though and it’s not as if the company is in decline. Deliveroo is actually performing well. The start of 2021 saw 91% more active users and a 114% rise in orders year-on-year. Its goal to reach 66% of the UK population by the end of 2021 is in sight, with more than 60% already covered. It has even successfully partnered with grocery shops for delivery both domestically and internationally.

These results are encouraging. But I think there are too many uncertainties that go beyond the numbers to invest any time soon.  

The Lloyds share price is rising

Lloyds is a very different story. At the moment, it’s one of my favourite UK shares. If its current price of 42p can return to the 62p of two years ago, investors would be looking at a 47% increase.

With a convincing P/E ratio of 10.8, £1.4bn profit at the end of 2020 despite Covid, and a strong, consistent and familiar brand, I think this is possible. The bank has also recently resumed dividend payments at a yield of 1.3% after a year in which its dividends were paused.

But as with all UK shares, there are a number of reasons I might stay away from this bank. If interest rates stay low, it’ll remain difficult for it to make money consistently. And how will it compete with the rise of digital banks like Monzo? Plus, its dividend yield is considerably less than the FTSE 100 average of 3.06%, and is therefore much less enticing.

These downsides aren’t putting me off yet, though. I’ll be keeping a keen eye on Lloyds’ performance as lockdown comes to an end and likely making an investment myself.

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Dan Peeke has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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