What does a banking boss have to do to get some love from investors?
Lloyds Banking Group (LSE: LLOY) has delivered several years of strong profit growth, plus generous dividends. The bank’s regulatory ratios look fairly decent and it’s steered clear of any fresh scandals.
Despite all of this, Lloyds’ share price has fallen by more than 20% since the end of January. Today I want to look at one possible reason for this decline. I also want to take a look at another potential value investment in an unloved sector of the market.
Do problems lie ahead?
The market’s treatment of Lloyds suggests that profit growth is expected to slow, and that worse problems may arise.
One of the main areas of concern seems to be mortgage lending. Strong competition means that lenders are under pressure to offer cheaper mortgages, even though interest rates are expected to rise.
Another risk is that falling house prices could leave borrowers with high loan-to-value ratios facing negative equity.
Is Lloyds at risk?
I should stress that these trends aren’t specific to Lloyds, whose lending appears to be relatively conservative. At the end of June, only 12.3% of the group’s mortgages had a loan-to-value ratio of more than 80%. Only 2.4% had an LTV of more than 90%.
Similarly, the bank’s profit margins appear stable. Net interest margin, a measure of profitability, rose slightly to 2.93% during the first nine months of this year. Return on tangible equity — a wider measure of profit — rose to 13%, from 10.5% for the same period last year.
As things stand, the shares look good value to me, trading at 1.1x tangible book value and with a forecast price/earnings ratio of 7.2.
City analysts expect flat profits next year, but this year’s dividend yield of 5.8% is still expected to rise to 6.3% in 2019. If I wanted big banking dividends, I would definitely consider buying Lloyds.
Is it time for another round?
Pub chains are battling rising costs and flat consumer spending in a competitive market.
FTSE 250 firm Mitchells & Butlers (LSE: MAB) suspended its dividend earlier this year, in order to free up cash for refurbishments and debt repayments. Although disappointing at the time, this prudent approach seems to be delivering results.
The group’s like-for-like sales rose by 1.3% during the year ending 30 September. Management said this rate of growth was ahead of the market average. Although adjusted operating profit fell by 1.6% to £303m, profits did return to growth during the second half of last year.
The current year has also started well. Like-for-like sales have risen by 2.2% over the last seven weeks, suggesting that investment in new and existing pubs is paying off.
Good company in a tough market
Mitchells & Butlers’ management seem to be doing everything it can to protect market share and attract new customers. The problem is that market conditions remain very difficult, especially in the casual dining sector.
At the last-seen price of 272p, the firm’s shares trade at a 34% discount to their book value of 413p per share. The stock also looks cheap relative to profits, with a forecast price/earnings ratio of 7.7.
I can see value here, even without a dividend. The risk is that it could be some time before market conditions improve. In the meantime, shareholder returns may be limited.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.