In the red corner, we have Rolls-Royce (LSE: RR.) shares. In the blue corner, we have Lloyds Banking Group (LSE: LLOY). Let’s see who comes out on top as a better investment in my view.
Valuations and recent performance
Rolls-Royce shares have spiked recently. As I write on Wednesday, 13 December, they’re trading for 299p, which is a 232% increase over a 12-month period. They were trading for 90p at this time last year. The pandemic ground the aviation industry to a halt and Rolls-Royce shares were struggling badly during that time.
At present, Rolls-Royce shares trade on a price-to-earnings-to-growth (PEG) ratio of 0.9. A reading of under one can indicate a stock is undervalued.
The business has recovered well from the pandemic. Net income for the past 12 months is £1.5bn, which is a significant rise on pandemic levels. New CEO Tufan Erginbilgiç’s focus on efficiency and transformation seem to be paying off.
Let’s move onto Lloyds then. The shares are trading for 45p, as I write. This is the same price I would have bought them for at this time last year. Economic issues have caused the shares to meander up and down in 2023. However, Lloyds shares have remained below 100p since the 2008 crash!
Using the price-to-earnings ratio, Lloyds shares look good value for money on a multiple of five. The FTSE 100 average is 14.
Lloyds is the biggest mortgage provider in the UK. Recent higher rates have helped push performance up which has boosted cash reserves, but not the shares.
Industry outlook
The aviation industry seems to be burgeoning at the moment, reflected by performance of players including Rolls-Royce, BAE Systems, and Airbus to mention a few. Demand for travel has increased, which has helped.
In comparison, the financial services industry is in a bit of a malaise. Higher interest rates, the battle against inflation, as well as the US banking crisis have caused legitimate fears of a recession. When you add to this that the UK housing market is struggling due to these aspects, there’s a lot of uncertainty in the air if you ask me.
Risks and my decision
My biggest issue with Rolls-Royce shares is its inconsistent performance. Plus, the business has lots of debt on its books. Recent positive performance has helped pay some of it off. However, with rising fuel costs and the potential for travel demand to fall if volatility continues, there are a few things for me to consider here.
As for Lloyds, new business for the mortgage provider is harder than ever to come by as interest rates are high and wages haven’t increased as much. Plus, higher interest rates and increased payments may boost the coffers now but the chances of defaults and credit impairments also rise. Could performance and cash flows fall when rates fall?
Despite these concerns, my winner is Lloyds shares. I think the business is on a better financial footing with lots of cash and a great market position. Its valuation is enticing. More importantly, it looks like a great passive income opportunity offering a dividend yield of close to 6%. However, I’m conscious dividends are never guaranteed.
Out of the two, I’d buy Lloyds shares today rather than Rolls-Royce shares if I had the investable cash.
