The Lloyds Banking Group (LSE:LLOY) share price has fallen 6% since the start of 2023. It’s a descent that continues to attract fans of value stocks in huge numbers.
According to Hargreaves Lansdown, the FTSE 100 bank is the sixth-most-purchased stock by investors using its trading platform in the past seven days.
It’s easy to see why this UK blue-chip share is so popular. It offers exceptional all-round value, at least on paper. At 43.4p per share it trades on a forward price-to-earnings (P/E) ratio of 5.7 times and carries a 6.4% dividend yield.
Big risks
But buying cyclical shares like this is dangerous in challenging economic times like these. A weak economy usually translates into poor loan growth and soaring credit impairments, as the bank has witnessed in recent months.
And with the Bank of England seemingly at the end of its rate hiking cycle, the bank’s net interest margins (NIMs) might fall sharply in the coming months. The NIM is a key metric of bank performance that measures the difference between the interest they pay savers and what they charge borrowers.
Margins will also come under pressure as competition ramps up from challenger and digital banks as well as building societies. The Financial Conduct Authority (FCA) will also continue closely watching the banks to check they are giving a fair deal to savers.
A better buy
That’s not to say that the high street bank is a basket case, however! Demand for essential financial products like current accounts and general insurance products should remain pretty stable. And Lloyds’ brand strength will also help it to continue winning customers in a competitive market.
But on balance I think the risks of buying the FTSE bank are too great. There are plenty of other big-cap value stocks I can buy today so I don’t feel I need to take a risk with Lloyds.
Food manufacturer and clothing retailer Associated British Foods is one FTSE 100 I’d rather snap up. Its Primark value fashion business should continue to trade strongly as the global economy struggles. And demand for its edible products is likely to remain rock-solid.
Today the shares trade on a forward price-to-earnings growth (PEG) ratio of 0.7. Any reading below 1 suggests that a share is undervalued. This sort of low multiple more than reflects the potential for further cost-related issues.
Another FTSE heavyweight
I’d also rather buy shares in GSK, a company that’s on a roll right now. The pharma giant trades on a prospective P/E ratio of 9.4 times and carries a meaty 4% dividend yield too.
GSK recently hiked its 2023 forecasts after underlying sales growth accelerated to 10% last quarter. Profits here could rise sharply next year as demand for it vaccines takes off. And it could prove a wise long-term buy as global healthcare spending steadily increases.
I’d snap up this cheap share even though drug development problems could derail earnings. After all, the company has an excellent record of getting its product from lab bench to pharmacy shelf.
