Why The Tipsters Like Lloyds Banking Group PLC Better Than Royal Bank Of Scotland Group plc

The banking recovery is firmly under way, but opinions on individual banks remain disparate. Just look at the bailed-out pair, and we see the punters decidedly bullish on Lloyds Banking Group (LSE: LLOY)(NYSE: LYG.US) but they don’t like Royal Bank of Scotland (LSE: RBS)(NYSE: RBS.US) one bit!

Looking at a sample of 24 analysts forecasting, a full 14 have Lloyds as a Strong Buy, with a 15th on a plain Buy recommendation. At the other end we have three with Strong Sell recommendations out, with the remaining six staying Neutral. While the presence of the Strong Sells does surprise me, that’s still one of the most bullish analysts’ outlooks of the FTSE 100 right now.

Two opposites

At RBS the position is pretty much the reverse, with only three out of 25 suggesting we should Buy the shares, and only one of them Strongly. There are more fence-sitters this time, with 13 remaining Neutral, and we have nine Sells with a full eight of those Strong.

Recent brokers’ price targets for Lloyds are averaging around 92p, which is a 15% premium on the current 80p share price and really quite bullish for the short term. Recent targets for RBS, at an average of 375p, are pretty much bang on the current price — so that’s more relative pessimism.

Why the difference? When we look at Lloyds’ progress compared to RBS’s and the relative valuations of the shares, I think it’s obvious.

Way ahead

Lloyds has already made a return to paying dividends. After recording an expectations-beating underlying profit of £7.76bn in 2014, the bank has recommended a dividend of 0.75p per share (with the approval of the PRA). That would provide a yield of only 0.9%, but it’s a very important milestone — and analysts are already forecasting yields of 3.6% for 2015 followed by 5.2% for 2016.

RBS, meanwhile, isn’t down for its first post-crash dividend for another year, and even then it is expected to yield a mere 0.5%. Forecasts follow that by 2.8% for December 2016, which would still be way behind Lloyds.

If RBS is so far behind in the recovery stakes, its shares should be more lowly valued, yes? Quite the opposite, in fact. While Lloyds shares languish on a forward P/E of only 10, dropping to 9.6 for 2016, RBS is already ahead on multiples of 12.7 and 12.3 respectively.

Lloyds easily wins

I reckon the analysts have got it spot on with these two, and that Lloyds is still a much better investment than RBS. My only surprise is that the market values RBS so highly at this stage.

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Alan Oscroft 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.