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Forget the Lloyds share price! I bought this FTSE 100 stock instead

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Scene depicting the City of London, home of the FTSE 100
Image source: Getty Images.

Is Lloyds Banking Group (LSE: LLOY) one of the best-value FTSE 100 stocks to buy today? Well, a quick glance at City forecasts would suggests that one of the UK’s favourite penny stocks could be too cheap to miss right now.

At 46p per share, the Lloyds share price trades on a forward price-to-earnings (P/E) ratio of around 7 times, well inside the widely-regarded bargain-benchmark territory of 10 times and below. This is built on broker expectations that the bank’s earnings will soar 425% in 2021.

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On top of this, analysts think Lloyds will turbocharge 2020’s full-year dividend of 0.57p per share to 2.2p in 2021. This results in a mammoth 4.7% dividend yield, which takes out the broader FTSE 100 average of around 3%.

Why I’m avoiding Lloyds

I have to confess I’m not tempted by the Lloyds share price. Okay, a steady rebound in the British economy could deliver strong and sustained profits growth at this most cyclical of UK shares. But I still think the FTSE 100 bank is still a risk too far. This is because:

  • A fresh spike in Covid-19 infections in Britain could significantly derail the economic rebound and thus a surge in Lloyds’ profits. One scientist has suggested a whopping 200,000 new daily cases of the coronavirus could emerge before too long.
  • Low Bank of England interest rates look set to stay, regardless of how badly this fresh wave of infections turns out. As well as facing a long road back from the global pandemic, the UK economy will also require support as it adjusts to Brexit changes. Rock-bottom rates reduce the difference that Lloyds can charge borrowers and give to savers, hitting profits in the process.
  • Competition from challenger banks is rapidly increasing. The emergence of digital-only banks like Revolut and Monzo has been a serious thorn in the side of traditional banks in recent years. And it looks like the problem is going to get much worse for Lloyds and its established peers. Allied Market Research reckons the neo and challenger bank market will be worth a jaw-dropping $471bn by 2027. That compares with closer to $20bn in 2019.

A brochure showing some of Lloyds Banking Group's major brands

A better FTSE 100 share to buy

So why take a chance with the Lloyds share price when there are so many other more robust FTSE 100 shares to buy today? For example, I bought building materials supplier CRH in my Stocks and Shares ISA.

Like Lloyds, profits at the company could suffer if rising Covid-19 infections hit the construction industry again. But I still bought it as infrastructure spending looks set to rise strongly across its key US and European markets over the long term. I also like CRH’s strong track record when it comes to acquisitions and its ongoing commitment to M&A.

CRH’s shares aren’t anywhere near as cheap as Lloyds. Today, it trades on a forward P/E ratio of 17 times. But I think its higher price reflects the company’s far superior investment prospects. 

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Royston Wild owns shares of CRH. 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.

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