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I’d ditch Lloyds and invest in this recovering 5%+ yielder instead

I’m not expecting the Lloyds Banking Group share price to recover much from its current level around 57p. But I do see plenty of risk to the downside for shareholders from the stock.

Instead of betting on shares in the banking sector, I’d rather go for enterprises engaged in other businesses such as light commercial vehicle hire operator Northgate (LSE: NTG), which trades in the UK, Ireland and Spain.

Underperforming operations

The share-price performance has been disappointing since early 2017, down more than 40% over the period. Although revenue kept rising annually, earnings and cash flow fell behind. Nevertheless, the directors did push up the dividend a little each year, which led to the yield above 5% that we see today.

Earlier this year, the chairman bowed to pressure from the activist investor Crystal Amber Fund and stepped down from his position after more than four years with the company. So today, we have the interesting situation of change at the top, which can be a driver of better performance in some businesses. The search for a new chairperson is in full swing and there’s an “exceptionally strong” short list.

Meanwhile, today’s full-year results report to 30 April looks promising and reveals total revenue increased around 6% compared to the previous year and underlying earnings per share rose by just over 11%. The directors increased the total dividend for the year by 3.4%

Turnaround strategy

Chief executive Kevin Bradshaw said in the report the “self-help” turnaround strategy in the UK is “delivering” and there’s a “compelling” opportunity for growth in the company’s markets. Regular price increases during the year and improvements in efficiency have fuelled expectations for improving overall revenue and profits in the current trading year.

Around 57% of operating profit came from Spain during the year and 43% from the UK and Ireland, which makes the Spanish market important to the firm. Although competition is increasing in Spain, the directors believe Northgate can expand its flexible hire business to provide a “comprehensive” range of fleet hire solutions to its customers. I reckon growth abroad could work with recovery in the home market to reverse the downtrend in the shares.

The directors reckon the firm is undervalued by the market and they are looking forward to working with a new Chair “to maximise value for shareholders.” Today’s share price close to 319p throws up a forward-looking price-to-earnings rating of around eight for the current trading year to March 2020. Meanwhile, City analysts following the firm expect earnings to increase by a high single-digit percentage.

I don’t think a valuation up-rating will arrive soon, or perhaps ever, because the company does operate in a cyclical sector. However, ongoing advances in earnings could drive the shares higher and help the directors to keep the dividend growing. I’d much rather invest in Northgate than in Lloyds. 

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group and Northgate. 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.