Have £2k to invest? Why I’d ignore Lloyds and buy this cheap FTSE 250 dividend stock instead

Royston Wild discusses a FTSE 250 (INDEXFTSE: MCX) income hero that he thinks is a much better pick than splashing the cash on Lloyds Banking Group plc (LON: LLOY).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the Brexit issue far from resolved, investment in domestically-focused banks like Lloyds Banking Group (LSE: LLOY) remains extremely risky business. Far too risky, in my book.

The FTSE 100 bank has already seen business hit as a result of the uncertainty created by the UK’s protracted exit from the European Union. And the outlook for Lloyds remains as clear as mud, with everything from a lengthy Article 50 extension to a catastrophic ‘no-deal’ Brexit still on the table, issues that threaten to harm profits growth at the firm in the near term and beyond.

Economic data for the UK continues to make for grim reading for the banking giant, the latest Office for National Statistics report showing GDP expanded just 0.3% in the first quarter, with the positive-but-artificial impact of Brexit-related stockpiling thought to have played a large part in this limp rise.

Such growth could well be considered a thing to behold in the near future, though. Indeed, in the event of a no-deal Brexit being signed off, the International Monetary Fund predicts a British recession that could last as long as two years.

Crazy forecasts?

For these reasons I’d be content to forget about Lloyds, about its compelling forward P/E ratio of 8.8 times which (on paper at least) suggests stunning value, and its bulging dividend yields of 5.1% and 5.4% for 2019 and 2020 respectively.

The Footsie bank is dirt-cheap for a reason. The possibility of City forecasts being blown wildly off course, estimates that suggest a 38% earnings rise in 2019 alone, is extremely high in the current economic and political landscape, and so are the chances of profits creation disappointing well into the next decade.

A better dividend buy

I do not see the point of gambling on Lloyds, when there are plenty of other blue-chips with stronger earnings outlooks not clouded by the spectre of Brexit. Take Cineworld Group (LSE: CINE), for example.

Britons may not have as much to spend in the current economic climate, but a trip to the cinema is a relatively inexpensive pursuit and so I’m not expecting box office takings at the multiplex operator to fall off a cliff, however our European Union exit goes. In fact, supported by the steady stream of blockbusters from Tinseltown — irresistible catnip for modern movie fans — as well as Cineworld’s ongoing cinema building programme I’m fully expecting profits to keep on swelling.

But if you’re still concerned over how Brexit will impact takings, I would urge you to consider Cineworld’s expansion into foreign territories, and more recently its takeover of US chain Regal Entertainment, as reasons to be optimistic. Its move into the North American market helped adjusted EBITDA on a pro-forma basis swell 9.4% to $1.07bn in 2018, illustrating the enormous profits potential of this one territory.

It’s not a shock that City analysts are predicting that earnings will swell 21% in 2019 alone, or that dividend yields sit at a chubby 4.3% for this year and 4.6% for 2020 thanks to expectations that payouts will keep climbing through this period. It doesn’t trouble me that these figures are less appealing than those over at Lloyds, just like the FTSE 250 firm’s forward P/E ratio of 12.6 times. In my opinion it’s a far superior stock to buy today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild owns shares of Cineworld Group. 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »