The terrible Covid-19 news flow of recent days has smacked UK shares of all shapes and sizes. Investor confidence has plummeted as forthcoming lockdown measures in Britain have cast fresh doubts over corporate profits. It shouldn’t have come as a shock to see the Lloyds (LSE: LLOY) share price in particular sinking again.
The highly-cyclical FTSE 100 bank, unlike other blue-chips such as HSBC and Standard Chartered, generates almost all of its profits from these shores. So while Lloyds advised last week that it expected loan loss provisions to come in at the lower end of its estimates (£4.5bn-£5.5bn), news of the new national lockdown has put these estimates in severe jeopardy already.
Lloyds in danger
According to ING Bank, those fresh Covid-19 clampdowns will reduce British GDP by 6-7% in November. They threaten to play havoc in December too, and possibly beyond, should the infection rate fail to come down. And so UK shares like Lloyds should be extremely worried.
The bank recorded pre-tax profit of just £620m between January and September, versus £2.6bn in the same 2019 period. Profits have collapsed due to those vast provisions, falling customer demand and rock-bottom interest rates. It looks as if Lloyds can expect more of the same for the rest of 2020 at least.
This is why I’m not tempted to go dip-buying Lloyds following its fresh share price fall. Sure, at current prices of 27.5p the bank trades on a price-to-earnings (P/E) ratio of just 8 times for 2021. But this is built on broker expectations that annual earnings will rocket 180% next year. Estimates that are looking increasingly unlikely given the current trajectory of the Covid-19 crisis.
What’s more, Lloyds’ monster 5.5% dividend yield for 2021 looks like it’s in even more peril. The UK share’s uncertain profits outlook is one reason why it might not restart dividends next year. Another is the possibility that the Prudential Regulatory Authority might keep its ban on British banks paying dividends to their shareholders too.
A better UK share
Why would I take a gamble on Lloyds today. Especially when there are so many other cheap, dividend-paying stocks for ISA investors like me to choose from.
One UK share I’d much rather buy this November is Flutter Entertainment (LSE: FLTR). This FTSE 100 share trades on a much-heftier P/E ratio of 29 times for 2021. But I think the gambling colossus is worthy of such a meaty premium.
City experts expect earnings here to rise 8% in 2021. And bright growth projections for the broader online betting market suggests investors in Flutter can — unlike owners of Lloyds shares — look forward to a long run of strong profits growth.
Indeed, I’d buy this UK share before third-quarter results come out on Wednesday, 11 November. Flutter certainly impressed the market in August with news that revenues rocketed almost 50% in the first half. And I’m expecting another brilliant update this week that could send its rocketing share price even higher.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of Flutter Entertainment. The Motley Fool UK has recommended HSBC Holdings, Lloyds Banking Group, and Standard Chartered. 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.