Lloyds (LSE: LLOY) shares remain one of the most popular FTSE 100 investor picks.
However, many other stocks in the leading index look like better buys right now to me. These include fellow bank NatWest (LSE: NWG).
Dividend returns
Lloyds paid a total dividend in 2023 of 2.76p a share. This yields 4.7% on the current 59p share price. NatWest paid 17p a share, which yields 5.3% on its present share price of £3.23.
It might not look much on paper, but the difference in dividend payments over the years is considerable. This is particularly true if the dividends are ‘compounded’ (used to buy more of each stock).
After 10 years on an average yield of 4.7%, £10,000 invested in Lloyds shares would make another £5,985. The same amount in NatWest shares would add £6,970.
Over 30 years on the same basis, an additional £30,847 would have been made from the Lloyds stake. The NatWest holding would have generated an extra £38,866!
Yields go up and down as share prices move and dividend payments change, of course. However, as it stands, it is a win in this category for NatWest.
Business outlook
A company’s revenues drive share price and dividends long term, but there is nothing to separate the banks here. Analysts estimate that each will see their revenues grow by 3.2% each year to end-2027.
Each is likely to see its interest margins between deposits and loans drop, as UK inflation and interest rates decline.
Lloyds faces an additional risk of big compensation payouts over the mis-selling of car loans through its Black Horse business.
That said, this does not tip the overall balance to NatWest in this category in my view, so it is a draw.
Relative undervaluation
Lloyds shares currently trade on the price-to-earnings ratio (P/E) share valuation measure at 8.2. This is the most overvalued among its peer group, the average P/E of which is 7.3.
NatWest is at the bottom of this peer group valuation table, presently trading at just 6.4. So it is the most undervalued on this basis.
I used a discounted cash flow to work out how cheap NatWest shares are in cash terms.
On this, they are 50% undervalued right now. So a fair value for them would be £6.44.
It does not necessarily mean they will trade there – it may be lower or higher. But it highlights how undervalued they look.
A second clear victory for NatWest – so two out of three for it, in my view.
Will I buy the shares?
I already own shares in NatWest and HSBC. These were bought at much lower price levels, so I am happy with them.
If I did not already have these, I would buy them today without hesitation. Both have a better mix of growth prospects, undervalued shares, and good yields than Lloyds shares, in my view.
