The FTSE 100 index includes five major banks. Barclays (LSE: BARC) shares are in there, as is Lloyds Banking Group (LSE: LLOY) stock. But shares in British banks have been a damp squib for years.
For the record, my wife and I own shares in both Barclays and Lloyds in our family portfolio. We bought Lloyds in June 2022 for 43.5p a share, followed by Barclays at 154.5p each in July 2022.
Battle of the giants
Earlier today, I wondered whether, had I to buy one of these two bank stocks today, I’d choose Barclays or Lloyds. As comedian Harry Hill exclaimed on TV Burp, “Which is better? There’s only one way to find out: FIGHT!”
1. Blue Eagle
Barclays — known as the Blue Eagle bank — is one of the UK’s Big Four. As well as being a clearing bank, it has an investment-banking arm, which is something that Lloyds lacks. Barclays employs around 85,000 staff to service around 48m customers.
Currently, the shares trade at 159.32p, valuing the group at £24.4bn. This is 19.9% below the 52-week high of 198.86p, reached on 12 March. Although the shares are up 1.1% over one year, they’re down 7.3% over five years.
That said, the above figures exclude cash dividends, which tend to be generous from UK banks. Right now, Barclays offer a cash yield of 4.8% a year — less than I could earn from top savings accounts. However, this payout is covered a tidy 4.5 times by earnings, which is a huge margin of safety.
2. Black Horse
With 26m customers and around 60,000 employees, Lloyds is also one of the UK’s largest financial firms. Through brands such as Lloyds Bank, Halifax, Bank of Scotland and Birmingham Midshires, it’s the UK’s largest mortgage lender.
As I write, the share price stands at 44.68p, valuing the group at £28.4bn. This is 17.8% below its 52-week high of 54.33p, hit on 9 February. Lloyds stock is unchanged over one year, but has dived by 24.6% over five years.
Long-standing shareholders know how frustrating owning Lloyds has been. But what drew me to buy the stock was its decent dividend yield. Currently, this stands at 5.6% a year, well ahead of the FTSE 100’s yearly cash yield of 4%. Also, this is covered 2.9 times by earnings, which is a solid margin of safety.
My pick
One thing I’d say is that buying bank stocks today could be a leap of faith. Thanks to rising interest rates, high inflation and steep energy bills, UK household incomes have taken a hefty knock.
As a result, analysts expect bank earnings to decline in 2023-24, driven lower by rising bad debts and loan losses. Also, slowing loan growth and falling house prices are hurting the housing market. And deposit migration is trimming banks’ net interest margins.
Thus, while bank shares may look cheap, valuations reflect concerns about lower earnings and cash flow. Even so, I would gladly buy more Barclays shares today, largely because of its exposure to growth outside of the UK.
Also, I prefer the Blue Eagle to the Black Horse for its more diversified income stream, including its Wall Street revenues. Then again, I absolutely wouldn’t sell either share — for now, at least!
