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Why I Am Glad I Own Barclays PLC And Not Lloyds Banking Group PLC

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The shares today

So far in 2013, it has been no contest between these two shares. Barclays (LSE: BARC)(NYSE: BCS.US) has barely risen, ahead just 1%. Shares in Lloyds (LSE: LLOY)(NYSE: LYG.US) have soared 45% in the same period.

In that time, Barclays shareholders were given the opportunity to stump up for more shares at 185p in a controversial rights issue. Although the Lloyds share price has performed significantly better, Barclays shareholders have done better than the share price suggests. As well as the rights issue opportunity, the bank has already declared 3p of dividends. Lloyds does not pay a dividend.

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The recent past

September was an eventful month for both. While Barclays went through the process of raising money, Lloyds saw its largest shareholder, the UK government, begin selling its stake.

The logic to be applied here is clear: Barclays was in a weak position, so needed to raise more funds. Lloyds was well on the way to a full recovery, which enabled to goverment to sell a large chunk of shares in the bank to hungry institutions.

However, the recovery at Lloyds has only reminded the market that there is a seller waiting to dispose of huge line of stock. Moreover, this seller is willing to accept 75p for their shares. The effect has been to ‘anchor’ Lloyds shares at around 75p.

While confidence in Barclays took a battering, at least the rights issues presented an opportunity to make big returns.

Barclays has also outperformend Lloyds in recent weeks. In the last month, Barclays shares are 1.9% ahead. Lloyds is down 3.2% in that time.

The future

The market has convinced itself of Lloyds’ recovery. Barclays still has some issues however and these are affecting profitability and perceptions. If management can successfully turn things around at Barclays, then the shares could enjoy a significant rerating.

Current broker forecasts back up this possibility. In 2014, Barclays is forecast to make EPS (earnings per share) of 30.9p. That puts the shares on a 2014 P/E of just 8.5. Lloyds currently trades on a 2014 P/E of 10.9: a 28% premium.

A big dividend increase is expected from Barclays next year, pushing the yield on the shares to 4.1%.

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> David owns shares in Barclays but none of the other companies mentioned.

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