Why Lloyds Banking Group PLC Is A Better Investment Than Bricks And Mortar Right Now

housesBritons are so obsessed about house prices that they overlook investments that have done far, far better.

Yes, UK house prices have risen an impressive 10.4% in the last year, according to the Office for National Statistics (ONS), but plenty of FTSE 100 stocks have thrashed that.

Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is one of them. Over the past 12 months, it has delivered share price growth of more than 27%, easily outstripping property.

Over two years, it is up a whopping 88%, against just 14% for property over the same period.

Clearly, there is more to life than bricks and mortar.

Yet while everybody has something to say about rising house prices, you don’t hear people talk so much about whizzy stock market investments like Lloyds. 

But they should, they really should.

Crash And Burn

Of course, Lloyds won’t always beat the property market. And there may be times when it take some absolute hammering, as happened during the financial crisis.

Its shares peaked a high of 607p in those distant pre-crisis days of February 2007. Just two years later, in March 2009, they had plunged to a low of around 45p. That’s a dramatic fall from grace.

If the housing market had suffered anything like that kind of fall, the nation would have been ruined.

Today, shares in Lloyds trade at 75p. The spectacular rebound of the last few years came from a low base.

LloydsThe Dividend Will Return

The Lloyds recovery process clearly still has a long way to run. Right now, it trades at a forecast 9.8 times earnings for December 2014. Earnings per share are set to rise 6% next year.

This once- proud dividend generator still doesn’t yield a bean. That could soon change. 

Lloyds may apply to the Prudential Regulatory Authority to restore its dividend later this year, and markets are forecasting a yield of 1.6% by December, rising to 4.2% one year later.

When the dividend returns, more investors should follow. This should give the share price a further boost.

Retail Therapy

Lloyds’ strong half-year results show its business continues to mend, with a 32% leap in underlying profits to £3.8 billion. Its capital position is stronger as well, with a common equity tier 1 ratio of 11.1%, up from 10.3% in December.

The bank has adopted the sensible strategy of shrinking its international presence to focus primarily on UK retail banking, which should make the business easier to understand, and a more solid investment.

Penalty Kicks

There are still plenty of shadows hanging over the bank, such as the endless stream of regulatory fines, most recently £218m for fiddling Libor. We saw earlier this week that ace investor Neil Woodford had given up on the banks, largely because of his fears over “fine inflation”. Lloyds isn’t immune.

There is also the worry over when the remaining taxpayer stake in Lloyds will be sold off, and what impact that will have on the share price. With an election looming, we may have to wait some time to find out.

House Prices Wobble

I would still consider buying Lloyds, but would think carefully before buying property as an investment today. There are growing signs that the market is slowing, especially in London, as buyers become increasingly nervous about paying today’s inflated prices. 

House prices rose by just 0.1% in July and August, according to a new house price survey from Hometrack.

Prices are now more than five times the local salary in 84% of the UK, making property increasingly unaffordable to ordinary people.

Both stock and property markets are risky right now. Housing looks overpriced, Lloyds does not. 

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.