Do I really rate Barclays (LSE: BARC) and Lloyds Banking Group (LSE: LLOY) shares as the two best to buy in the New Year?
Let me take us back in history.
A long time ago, I lived on the sunny south coast of Dorset. I spent many a Saturday afternoon watching lower division football. And I held both Lloyds and Barclays shares.
Unbelievable predictions
If someone told me that, one day, I’d be able to buy Lloyds on a price-to-earnings (P/E) ratio of 6.5, and Barclays even cheaper at 5.2, I’d have thought they were having a laugh.
“You’ll be telling me next that AFC Bournemouth will one day be in the Premier League,” I might have scoffed.
But these things, and stranger ones, have come to pass.
The elephant
There’s an elephant in the room here, for me at least. For years, I’ve been weighted towards the financial sector stocks with my Stocks and Shares ISA. And sometimes, that’s hurt me.
I’ve always thought of diversification as an essential for any stock market investor. It can really ease the pain when a single sector has a hard time.
And, I do try for as much diversification as I can.
So, will I take too much risk if I put my next chunks of investment cash into Lloyds and Barclays shares?
There’s always conflict
Well, the aim for safety is always in conflict with one or more other bits of good advice from the experts.
Right now, I’m drawn to something that billionaire Berkshire Hathaway boss Warren Buffett once said:
Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.
Letter to Berkshire Hathaway shareholders, 2016
In late 2023, it looks to me like banks and other financial stocks are suffering from the worst storm in years. And the raining gold comes in the from of cheap bank shares, with very tasty long-term dividend prospects.
Opportunity vs risk
It’s up to everyone to balance their own take on the various tugs of safety, opportunity, and risk. Who knows, when I think I have enough bank shares, maybe I’ll buy some National Grid, or Unilever.
But right now, what do I like so much about these two banks? Is it just their low P/E multiples? No, here’s a table showing my key things (correct at the time of writing):
| Bank | Barclays | Lloyds |
| P/E 2023 | 5.1 | 6.4 |
| P/E 2024 | 4.8 | 7.0 |
| Dividend yield 2023 | 5.3% | 5.4% |
| Dividend yield 2024 | 6.1% | 6.0% |
| Buybacks in 2023? | Yes | Yes |
| Latest CET1 | 14.0% | 14.6% |
Those last two indicate strong liquidity to me. Both have had lots of cash to hand back in 2023, and both had liquidity ratios well in excess of their targets.
Across the board
Now, banks face risk from today’s high-interest rates. Lloyds possibly the most, as it’s tied to the mortgage market.
Both could end the year having to make hefty provisions for bad debts. In fact, they’re already heading that way.
But, I see possible ‘buy’ signs across the board — in valuation, dividends and liquidity. When all three come together like that, I reach for my biggest washtub.
