The Motley Fool

Forget Lloyds! I think these financial stocks look more promising

Over the past year, shares in Lloyds Banking Group (LSE: LLOY) are down more than 11%. There are a few reasons for this. Firstly, the impact of Brexit has caused a headache for the business. The bank is focused on the UK market, so without international diversity, Lloyds will feel any pain from domestic issues more than rival HSBC.

The company has also faced larger than expected payments for PPI claims in following the final deadline date at the end of August. Lloyds anticipates this cost to be around £1.2bnn to £1.8bn. This will probably mean the return-on-equity ratio will be lower than investors were predicting.

Trading at a price-to-earnings ratio of 9 and a dividend yield of 6%, this stock may seem like a must-buy for some investors. Yet I remain cautious. The UK bias seriously concerns me, especially in view of a possible no-deal exit from the EU. Instead I would look for a better diversified company, still with a lumpy dividend yield and trading at a good valuation.

Well diversified

Investors in Aviva (LSE:AV) also have concerns about Brexit, and these nerves have affected the share price recently, knocking it down by 18% over the previous year. This has led the company to have a very attractive price-to-earnings ratio of 11.

I think these worries are overstated. The business is diversified internationally, operating in Asia and Canada, albeit most of the income emanates from the UK and Europe. Aviva has committed to splitting out the UK life insurance business from the general insurance operation as part of a restructuring exercise focused on the UK operations, in order to strengthen the company.

I’m impressed by the new management that was announced in March, CEO Maurice Tulloch now being at the helm. Having worked his way up at the company, he is well positioned to know in which areas it could improve. For example, Aviva was previously unable to effectively cross-sell its policies. This has now been addressed, with multi-policy discounts being provided by the company.

Tulloch has also earmarked potential savings of £300m a year for the next three years and is hoping to ramp up cash flow. The new CEO also realises the importance of Aviva’s generous 7% dividend and is hoping to preserve this.

All round, I think this could be a promising stock to hold. 

An income investing gem

Another financial business that gets me excited at the moment is Legal & General (LSE:LGEN). Again, the price of the stock has been dampened by fears over Brexit. In the past year, the price has dropped by 3%. The group is now trading with a price-to-earnings ratio of 7, and its prospective dividend is yielding 7.5%. There is a track record of this dividend increasing year-on-year.

The company released its half-yearly results early in August, and posted an increase in its operating profit of £1bn, or 11%. Added to that, the business seems well prepared for Brexit, with the investment management arm receiving the relevant EU authorisation back in 2018.

With an uncertain Brexit on the horizon, investors are understandably nervous. However, I think there are still buying opportunities out there, even for financial stocks.

High-Yield Hidden Star?

Discover the name of a Top Income Share with a juicy 7% forecast dividend yield that has got our Motley Fool UK analyst champing at the bit!

Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”.

Click here to claim your copy of this special report now — free of charge!

T Sligo has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and 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.