The Lloyds Banking Group share price has been stuck below 50p since April, giving it a decent claim to the biggest FTSE 100 bargain of the year. But I think there are some other worthy contenders.
To be clear, if I had £1,000 to invest, I’d happily use all of it to buy 2,129 shares in Lloyds. A couple of other stocks are also on my radar, though, one of which is Unilever (LSE:ULVR).
Valuations
Shares in Unilever currently trade at a price-to-earnings (P/E) multiple of 13. The Lloyds P/E ratio is much lower at around five.
Furthermore, Lloyds shares have a higher dividend. At today’s prices, the stock yields 5.35% compared to Unilever’s 3.99%.
On the face of it, this means Lloyds shares are clearly better value. But there are a couple of things I need to be careful about before jumping to this conclusion.
Cyclicality
Virtually all businesses find their earnings fluctuate from year to year. But banking is one of the most cyclical industries around, meaning profits are subject to greater-than-average volatility.
It’s worth noting, then, that 2023 has been an especially good year for banks, including Lloyds. Higher interest rates has allowed them to earn greater returns on their loans, boosting profitability.
This doesn’t undermine the company’s earnings from this year, but it does mean that investors, including me, should be cautious. With interest rates expected to fall, this year’s results might not be sustainable.
Dividends
If Lloyds finds itself making less money next year, two things will happen. First, the P/E ratio will increase (unless the share price falls) and the dividend will likely be lower.
A look back at the company’s track record illustrates this point. The amount Lloyds has returned to shareholders over the last five years has been highly variable, from 3p this year, to nothing in 2020.
Unilever, on the other hand, has a stellar track record in this regard. Having increased its dividend for the last 25 consecutive years, the stock is a Dividend Aristocrat.
The year ahead
This indicates that Unilever is much less likely to lower its dividend in 2024. But it’s not as though the stock is without risk, of course.
Inflation has been a constant issue for the business in 2023. While its brands give it some ability to raise prices and pass additional costs on to customers, this isn’t limitless.
By contrast, Lloyds has managed to increase its customer deposit base steadily over the last decade without losing significant membership. That’s a big strength of the business.
Which is the FTSE 100’s best bargain?
Right now, I’d rather invest in Unilever shares than Lloyds. I think the steady, predictable nature of the business is worth the slightly lower dividend yield at the start.
As I mentioned before, though, Lloyds is on my list of stocks to consider buying. Since there’s no rule saying I can’t, I’d be tempted to buy both at today’s prices.
