UK bank stocks have been getting a bit of attention recently. This could be due to the fact that most are well off their 52-week highs?

Currently, I don’t own any bank stocks in my portfolio. So is now the time to buy some? Let’s discuss.

These stocks are dirt-cheap

I can certainly see some appeal in these stocks right now. For starters, they look cheap relative to the market. The table below shows the forward-looking price-to-earnings (P/E) ratios of the UK’s largest five banks.

Those P/E ratios are low. To put the numbers in perspective, the median P/E across the FTSE 100 index is about 13.5, at present. So there could be potential for share price appreciation here.

One reason to be optimistic about share prices is that profits across the sector are getting a boost from higher interest rates. Banks generate a large chunk of their income from the spread between lending and borrowing rates. The higher rates go, the larger the spreads they can generate.

We saw this in Q3. For example, HSBC’s net interest income surged 30% to $8.6bn, thanks to higher rates. Looking ahead, central banks are likely to continue increasing interest rates in an effort to bring down inflation. So banks’ profits could get a further boost.

Attractive dividend yields

Secondly, there are some attractive dividend yields on offer across the sector at the moment. This table shows prospective yields using analysts’ current dividend forecasts (these shouldn’t be relied upon).

As you can see, Lloyds, HSBC, and NatWest all have yields in excess of 5% right now. In today’s choppy market, a 5%+ yield is attractive, in my view.

One major risk

Of course, the big risk here is the economy. Banks’ performances are closely linked to economic conditions and, right now, conditions look ominous.

Last week for example, the Office for Budget Responsibility (OBR) said that the UK economy (which is already in a recession) is set to shrink by 2% in the next 18 months, leading to over half a million job losses by the second half of 2024.

“The medium-term fiscal outlook has materially worsened since our March forecast due to a weaker economy, higher interest rates, and higher inflation”, said the OBR.

If economic conditions do continue to deteriorate, I’d expect the banks to see higher loan losses. This could lead to lower earnings (and possibly lower dividends too). In this scenario, the stocks may not look so cheap after all.

It’s worth noting here that in HSBC’s Q3 results, it posted expected credit losses (ECL) of $1.1bn, versus $659m a year earlier. This dragged pre-tax profit down 42% to $3.1bn.

Long-term threat

Another issue for long-term investors like myself to consider is the huge amount of disruption in the financial services sector. Right now, FinTech companies such as Revolut, Monzo, and Wise are capturing banking market share. Traditional banks such as Lloyds and Barclays are going to have their work cut out to retain customers.

My move now

Weighing this all up, I’m not in a rush to buy bank stocks for my portfolio right now. Sure, the sector looks cheap. But that’s because economic uncertainty is high.

All things considered, I think there are better stocks to buy for my portfolio today.

The post UK bank stocks have fallen. Should I buy them now? appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, Standard Chartered, and Wise plc. 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.

Having risen 31% in 2021, the Lloyds (LSE: LLOY) share price is on its way back down. The stock dropped below 50p in late February and is now at risk of entering the 30p-40p range. With a potential recession on the cards, this could be a possibility.

Interesting developments

In theory, bank stocks should benefit from interest rate rises. This is because they can charge higher interest rates for lending money, thus giving them higher margins. And because of Lloyds’ healthy reserves, it’s been able to keep interest rates it pays out for savings accounts at an all-time low, while charging customers more for loans. As such, I would normally expect its share price to rally. Nonetheless, the opposite has happened. So, why’s that been the case?

The roof’s caving in

In its last trading update, the bank included a table that consisted of prudent economic scenarios. It listed several conditions that have to be met in order for the company to benefit from rising interest rates.

Based on the current economic data and forecasts, Britain’s biggest bank has some upside potential. GDP for 2022 is set to be in line with or better than its various scenarios at 3.5%. Interest rates are expected to increase by more than 1.39%, and the unemployment rate should remain below 4%. However, that’s where the positives end.

The Bank of England (BoE) expects inflation to peak at 11% this year. But more importantly, both the Halifax and Rightmove‘s house price index have indicated that house price growth is beginning to stall. If this continues, it would fail to meet Lloyds’ projections of HPI growth and CRE price growth, endangering its projections. Given that most of its revenue stems from property-related loans, a slower home loans market could offset potential gains from higher interest rates.

Handouts in jeopardy

The FTSE 100 firm currently has a dividend yield of slightly more than 4%, which is above the index’s average. If I’d bought in hopes of a bigger payment at the next declaration date as a result of better margins, I could be disappointed.

Earlier this week, the BoE released its latest Financial Stability Report. It said UK lenders appear to be resilient. Nevertheless, major UK banks would have to set aside more cash to absorb any shocks in the financial markets from next year.

Lloyds will have to raise its buffer for bad debts. The group had already set aside £178m to cover potential customer defaults in Q1, but this is set to increase due to the BoE’s guidance. Consequently, I think its dividend payments might not increase by a huge margin. I could be wrong though. Analysts are forecasting its dividend to grow by 16.1% in the coming year. This may earn me some passive income if I were to invest.

For me, investing in Lloyds is like investing in the British economy and its property market. Economic projections from the World Bank and OECD are less than bullish for the UK currently. Then there’s sky-high inflation and a potential housing market decline that won’t do Lloyds’ top line much good. For those reasons, I won’t be investing in Lloyds shares, as I think its share price could drop below 40p soon.

The post Is the Lloyds share price about to dip below 40p? appeared first on The Motley Fool UK.

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John Choong has no position in any of the shares mentioned. 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.

Can these UK banks stocks recover? I think it’s certainly possible. After all, banks stocks have crashed before and rebounded. That said, a recovery is likely to take time. And there are a few things that need to happen.

Why have Lloyds, HSBC, and Barclays shares crashed?

The main reason bank shares have crashed this year is that economic conditions are woeful. As a result of Covid-19, businesses are struggling and this is resulting in an increase in loan defaults. This is bad news for the banks. Their profitability is taking a hit.

HSBC, for example, recently advised that it has seen a “material increase” in expected credit losses and other credit impairment charges (ECL). Lloyds, meanwhile, registered £3.8bn in impairment charges in the first half of the year.

If economic conditions begin to recover, banks will benefit. Subsequently, their share prices could rise.

Another key reason bank shares have crashed this year is that interest rates have plummeted. Low interest rates are not good for banks. This is because they earn a lot of their income from the spread between the interest rates they charge to lend money and the interest rates they offer to borrow money. The lower interest rates are, the less opportunity there is for banks to profit.

I expect that we will be stuck with low interest rates for a while. However, eventually, rates may begin to rise. This could push bank stocks higher.

Can UK bank shares recover? 

Looking beyond these issues, there are a few other things that need to happen for UK bank stocks to fully recover.

Firstly, the banks need to stay out of trouble. Recently, HSBC has been in the news in relation to money laundering allegations. Leaked documents showed that the bank had moved vast sums of money around the world for criminals. This hit the share price. Meanwhile, Lloyds was plagued by PPI charges for years. Banks need to clean up their act and avoid being fined by the regulators.

Secondly, we need to see dividends reintroduced. Earlier this year, the Bank of England banned UK banks from paying dividends due to Covid-19. The reintroduction of dividends could see interest in bank shares increase, pushing their share prices up.

Finally, banks need to ensure that they innovate. Right now, the financial services industry is evolving at a rapid rate. Digital banks such as Monzo, Revolut and Starling, and FinTechs such as PayPal, TransferWise, and Monese are changing the game for consumers. Lloyds, HSBC, and Barclays need to join in to protect their market share.

UK bank stocks: slow recovery

In summary, a recovery for UK bank stocks is possible. However, a recovery is not going to happen overnight.

As such, if you’re looking for investment opportunities right now, you may be better off ignoring Lloyds, HSBC, and Barclays and focusing your attention on businesses with stronger growth prospects.

The post Can Lloyds, HSBC, and Barclays shares ever recover? appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Lloyds Bank and PayPal. The Motley Fool UK owns shares of and has recommended PayPal Holdings. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group and recommends the following options: long January 2022 $75 calls on PayPal Holdings. 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.

Are these FTSE 100 titans now great picks for savvy, contrarian investors wanting to double their money? Here’s my take.

Lloyds Bank

The fact that the Lloyds share price has halved in recent weeks isn’t all that surprising. The UK economy is, after all, expected to contract at its fastest rate for centuries in 2020 and take an estimated three years to fully recover. 

This puts the FTSE 100 constituent in a sticky spot. With businesses shut and the prospect of rising unemployment, many firms and their workers may struggle to make payments on loans and mortgages, even with the introduction of ‘holiday’ periods. Incredibly low interest rates continue to be a drag on profits too. 

At the start of April, shares in Lloyds went for 27p a pop. Although they’ve recovered slightly over recent days, they’ve not rallied anywhere near as much as other listed stocks. This suggests to me the market is still very cautious about the bank’s near-term outlook.

Thanks to regulators, Lloyds is in a far better state as a business than it was back in 2008. That said, I don’t think there can be any doubt the road ahead will be long and hard. With no dividends to keep investors incentivised, the idea it will quickly double its £21bn valuation is (very) optimistic.

If you’re determined to take a position, I’d at least wait until after the bank releases its Q1 statement on Thursday. 

Royal Dutch Shell

Shell, of course, has its own set of ‘coronavirus complications’ to deal with. A lack of demand for the black stuff around the world has led to a collapse in the oil price and concerns the company may finally lose its ‘most reliable dividend payer’ crown. 

This makes perfect sense. As long as uncertainty persists over when lockdowns might be fully lifted, the price of Brent crude will likely remain stubbornly low and Shell will be burning through cash. The share price may be almost 50% higher than March’s low, but it’s still down 40% year-to-date.

So, what might help from here? The easing of restrictions around the world will certainly be a boost. More cars on the roads mean a greater demand for oil. The agreement between Russia and OPEC to cut output from next month may also help to provide a floor on the oil price for a while.

For Shell’s share price specifically, news of reduced spending and falling production costs helping to secure its much-coveted dividend will likely go down well. 

We won’t have long to wait for an update. Like Lloyds, the company also releases a Q1 statement on Thursday. 

Bottom line

I fancy both Lloyds and Shell could double new investors’ money in time, albeit slowly (the former in particular). This assumes, of course, the UK and other countries manage to avoid significant ‘second waves’ and further economic pain.  

As always, we at the Fool UK see any stock purchase as a long-term commitment. I’d caution against taking a ‘punt’ on either company if you aren’t prepared to stay invested for the duration.

The post Can you double your money with Lloyds Bank and Royal Dutch Shell? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. 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.

Having struggled to keep costs under control during the first half of 2018, this morning’s numbers suggest to me that the overhaul of Europe’s biggest bank is finally beginning to bear fruit.

Returning to growth

Reported pre-tax profit hit $5.9bn over the third quarter — an expectation-beating increase of 28% on that achieved in 2017, thanks to “strong revenue growth and lower operating expenses”. Adjusted pre-tax profit — which excluded the impact of foreign exchange fluctuations — came in 16% higher at $6.2bn over the three months to the end of September. Reported loans also increased by $8bn.

Still only eight months into his tenure, CEO John Flint stated that today’s numbers showed that HSBC was “delivering growth from areas of strength, and investing in the business while keeping a strong grip on costs.”

Indeed, growth in all of the company’s businesses brings HSBC’s pre-tax profit for the first nine months of 2018 to $16.6bn — up 12% — even though operating expenses of $25.5bn were recorded, mostly as a result of further investment. Adjusted profit before tax of $18.3bn was 4% higher than last year, and reported revenue rose 5% to $41.1bn, thanks to higher deposit revenue, especially in Asia.

All told, today’s update was encouraging. The question, however, is whether the shares are worth buying in the current economic and political climate?

Income play

Despite UK banks being far more stable than they were as a result of increased regulation, stocks have been weak for a while now, and HSBC is no exception. A year ago, the shares were yours for 737p a pop. Before this morning, they could be purchased for 605p — representing an 18% dip in value over the period.

This downward trajectory left HSBC trading on a price-to-earnings (P/E) ratio of a little under 11 for the current year, before markets opened.  While fairly cheap relative to other companies in the FTSE 100, this makes it more expensive to buy than sector peers Lloyds and Barclays (on valuations of 7 and 8 times earnings, respectively). Take into account the low returns on equity that impact on all three, and HSBC doesn’t exactly scream value.

That’s not to say the shares aren’t attractive for other reasons. Despite being dearer, the stock currently yields 6.4% at today’s share price, more than the aforementioned FTSE 100 constituents. Positively, the extent to which these payouts are covered by profits is also beginning to look far healthier than in previous years, even if analysts don’t expect much in the way of dividend growth in 2019.

In addition to being a solid source of income, the significant growth opportunities available around the world (but particularly in China) can’t be dismissed, and give the company excellent diversification in terms of earnings. Being a truly global player is undoubtedly a good thing as the UK crawls towards its official departure from the EU next March.

While not a screaming buy, as a buy-and-hold income stock, I think there are certainly worse options out there than the second biggest company in the UK. Just don’t expect the share price to gallop after today.

The post Is HSBC a screaming buy after today’s news? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

According to a report from the National Audit Office, up to 8.3m people are unable to pay off debts or household bills. And the situation is only getting worse, with figures from the Office for National Statistics showing Britons spending an average of £900 more than they earn each year.

Today I’m looking at which FTSE stocks could crash, if the UK consumer debt bubble bursts.

Safe as houses?

Lenders are the obvious place to start. Mortgages represent the lion’s share of household debt, so UK-focused banks with large mortgage books — Lloyds and Royal Bank of Scotland— are potentially vulnerable, as are challenger banks, such as Virgin Money and Paragon, which have been aggressively growing their mortgage books.

I say ‘potentially vulnerable’ because, in the words of Warren Buffett, “you only learn who has been swimming naked when the tide goes out.” If the consumer debt bubble bursts, some lenders’ underwriting standards and affordability assessments will prove to have been inadequate.

We’d likely see a severe tightening of lending criteria. If mortgage availability were to plunge, the FTSE 100‘s housebuilding giants, Barratt, Persimmon and Taylor Wimpey (as well as smaller peers, like Bellway, Berkeley and Redrow)could see demand fall off a cliff.

Unsecured debt

The Bank of England says unsecured debt (credit cards, short-term loans, etc) has hit a record high of £214bn — “far outstripping the personal debt mountain that preceded the 2008 economic crash,” according to The Times. Bloomberg recently reported that Barclays‘ chief executive Jes Staley isn’t too worried about the risks of Brexit and a US-China trade war, as reaching for his Barclays credit card, he says that it’s such cards that are “the biggest risk in the bank.” 

Car finance packages, which now fund four in five new car purchases (up from one in five in 2006) are another significant area of risk. The big banks have exposure here too, but there are also smaller specialists in the field, such as S&U and PCF. The prospect of a flood of drivers returning their cars and walking away from the rest of their loans would be bad news not only for lenders, but also for car dealers, already struggling with other issues, like Vertu, Lookers and Pendragon. Indeed, the consumer discretionary sector in general would be vulnerable, particularly companies like DFS Furniture, which relies heavily on being able to offer customers interest-free finance.

Buy, buy, buy!

Personally, I see the UK household debt bubble, and the consequences of it bursting, as too serious to ignore. As such, I’m avoiding the stocks I’ve mentioned in this article. However, there is a counter-argument from a more sanguine perspective that these are exactly the stocks investors should be snapping up right now.

The balance sheets of banks and housebuilders are stronger than ever and all the companies mentioned have low forecast earnings multiples, providing investors with a ‘margin of safety’. S&U, PCF and DFS are on double-digit multiples, but below the FTSE 100 long-term average of 14, while every other company mentioned is on a single-digit rating, some as cheap as half that of the Footsie long-term average. I’ve almost tempted myself … but not quite.

The post Warning: I think these FTSE stocks could crash if the UK debt bubble bursts appeared first on The Motley Fool UK.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, Lloyds Banking Group, Pendragon, Redrow, S & U, and Vertu Motors. 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.

Today, I want to profile two under-the-radar banking stocks that both pay shareholders dividends as well. Could these boost your personal balance sheet?

Close Brothers

Reporting full-year results today is Close Brothers Group (LSE: CBG), a FTSE 250 bank I have long been bullish on. What appeals to me most is its dividend growth track record. Whereas banks such as Lloyds and Barclays slashed their dividends during the global financial crisis, CBG maintained its payout. And since then, it has recorded eight consecutive dividend increases, which is an excellent achievement.

FY2018 results today look solid. For the year ended 31 July, adjusted operating profit rose 4% to £278.6m, and adjusted basic earnings per share increased 5% to 140.2p. The loan book grew 6.6% on an underlying basis to £7.3bn, and the bank generated a return on equity of 17%. Once again, it hiked its dividend by an inflation-beating 5%, taking the total payout per share to 63p (a yield of 3.8%). CEO Preben Prebensen commented: “All of our businesses have continued to successfully navigate and make the most of current trading conditions, while continuing to focus on maximising opportunities in future years.”

So, it appears that the business has momentum at present. But are the shares a ‘buy’ right now?

They don’t look expensive at present, trading on a P/E ratio of 11.8, although that’s a higher valuation than Lloyds (forward P/E 8.0) and Barclays (forward P/E 8.3). Knowing that the stock does tend to move up and down a fair bit, it could be worth waiting for a more attractive entry point, I think. With a bit of patience, it’s probably possible to pick up CBG at a slightly lower price with a yield above 4%. For now, I’m keeping the bank on my watchlist.

Another dividend-paying bank

Another FTSE 250 bank that looks really interesting from a dividend-investing perspective is challenger bank OneSavings Bank (LSE: OSB). Since paying a maiden dividend of 3.9p in 2014, it has increased its payout by 230% and is forecast to reward shareholders with a dividend of 14p per share this year. That equates to a healthy yield of 3.4%, with projected dividend cover of almost four times.

Like Close Brothers, it has a fair bit of momentum at present. In August, the group posted a 17% rise in profit before tax and lifted its interim dividend by a huge 23%.

As a buy-to-let specialist, there are risks to the investment case here in the form of regulatory meddling and property market weakness. Yet, in my view, these risks are already incorporated in the stock’s valuation, as its forward P/E ratio is a low 7.8. When you consider that other challenger banks, such as Shawbrook, Aldermore and Virgin Money, have all been targeted for takeovers recently, that valuation looks worth the risk.

The post Are these banks better buys than their FTSE 100 peers? appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays 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.

Healthy at last 

And these characteristics together with the company’s current share price make me think it’s one of the best banking stocks on offer for UK investors. This is because at exactly 1 times book value, its share price bakes in little to no growth, which I think is a mistake.

In fact in 2017, the bank’s adjusted revenue rose 5% to $51.5bn as each of its three main business lines performed well during the year. Even more impressive was the group’s bottom line performance as cutting costs, exiting underperforming markets and rising interest rates helped boost adjusted pre-tax profits by 11% to $21bn.

Increased profits kept the bank’s year-end tier 1 capital ratio at 14.5%, well above regulatory minimums and enough to once again pay out $10.2bn in dividends of $0.51 per share. At its current share price, this means shareholders enjoy a 5.65% yield from their quarterly dividend cheques. On top of this, management used its healthy balance sheet to buy back $3bn of its own shares with further buybacks likely on tap.

Investing in future growth  

Looking ahead, I see good reason for these shareholder returns to grow as management cuts costs assiduously and deploys more of its capital towards high-growth Asian economies. The focus of this plan is China, where management has launched new retail banking products such as credit cards, expanded its insurance and asset management capabilities and opened overseas desks to lend to Chinese businesses taking part in the government’s massive One Belt One Road infrastructure programme.

In 2017, net loans to Asian customers rose 20% to $426bn, which helped increase revenue from the region by 15% to $25.9bn. This cemented the region’s status as the most important contributor to group profits and this trend should continue as the bank slims down in smaller markets and refocuses capital towards Asia.

This trend is not only setting the stage for future growth as HSBC leverages its roots in the region to piggyback on fast-growing economies, but is also helping to increase profits in the short term. In 2017, statutory return on equity (ROE) rose from 0.8% to 5.9% year-on-year and represents a major step forward in management’s target of ROE in excess of 10% in the medium term.

This looks eminently achievable and would make the bank one of the healthiest of its peers with huge shareholder returns and a stable capital position. While HSBC may be a riskier bet than the likes of Lloyds due to its international presence, I think this represents a source of fantastic long-term growth that UK investors would do well to consider adding to their portfolio.

The post HSBC’s share price shows it could be the best banking stock around appeared first on The Motley Fool UK.

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Ian Pierce 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.

It has remade itself into a very profitable bank with metrics that the other big four banks could only dream about. And although its shares have recovered strongly post-Brexit, there are a number of bullish catalysts ahead that could lead to further gains in its share price.

Rising interest rates

First, the outlook for rising interest rates bodes well for future earnings, as it is expected to improve the profit spread between the interest income it generate and what it has to pay out to lenders, ie those of us who deposit our money there. That’s its net interest margin.

The bank seems to be already benefitting from the Bank of England’s decision to increase its base rate by 25 basis points, as net interest margins in 2017 widened to 2.86%, from 2.71% in the previous year. Looking ahead, Lloyds reckons its net interest margin could rise still further, giving guidance of around 2.9% in 2018.

As well as growing its interest income, Lloyds has ambitious plans to expand its financial planning and retirement propositions. It has set itself a target to grow its open book assets by more than £50bn by 2020 with more than one million new pension customers.

PPI deadline

Also, not long from now, payment protection insurance (PPI) claims should start to fall as the August 2019 deadline to claim compensation approaches. This would end a major drag on its earnings, which has so far cost the bank more than £18bn in profits since the financial crisis.

If we set aside these PPI provisions, along with other non-recurring costs which included its restructuring and other legacy misconduct charges, Lloyds would have earned a return on tangible equity (RoE) of 15.6%. Instead, its statutory RoE was just 8.9% in 2017 — though that still exceeded most of its major competitors and was an improvement from the 6.6% figure from the previous year.

Growing shareholder payouts

An outlook for improving returns brings me to my third reason — growing shareholder payouts. Lloyds’ dividend was suspended during the last financial crisis, but the stock is rapidly becoming one of the FTSE 100’s top dividend stocks.

Since the bank returned to dividend payments in 2014, it has delivered impressive growth in annual dividends year after year, supported by strong capital generation and its robust balance sheet. Most recently, it announced a 20% increase in its 2017 payout, with full-year ordinary dividends totalling 3.05p per share.

And it’s not just through dividends that the bank is returning cash to shareholders. This week, management also announced a share buyback of up to £1bn, which would bring total capital returns from the bank to around 46% for 2017.

Looking ahead, I expect capital returns to rise to more than a majority of its capital generation as returns continue to improve. City analysts seem to agree, with a consensus dividend forecast of 4.4p in 2018 giving it a prospective dividend yield of 6.5%.

The post 3 reasons why the Lloyds share price could have further to go appeared first on The Motley Fool UK.

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Jack Tang has a position in Lloyds Banking Group plc. 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.

Big pharmaceuticals such as GlaxoSmithKline, AstraZeneca and Shire earn the label ‘defensive’ because their underlying businesses tend to be good at generating incoming cash flow whatever the general economic weather. Selling medicines is a classic consumer goods set-up. Customers return time and again for their drugs, rarely missing a purchase just because economic times might be tough, which is great for investor dividends.

Big banking firms such as HSBC Holdings, Lloyds Banking Group and Barclays fall into the category of ‘cyclicals’ because their underlying businesses tend to thrive or shrivel depending on the health of wider economic cycles. Instead of the constant cash flow we see with defensives, cyclicals often suffer from plunging cash flows and falling share prices when economic times are hard, which is bad for investor dividends.

An emerging opportunity and a constant threat

Defensives are becoming cheaper because their share prices have been falling for the past year or so, mostly because valuations had risen too high. These also tend to fluctuate in a cycle of their own. When economic times are uncertain — such as over the past 10 years since the credit crunch — investors find the stability of defensives attractive and they buy their shares, driving share prices up. On top of that, interest rates have been low for so long that we’ve seen the so-called bond-proxy trade go something like this: “I can’t get a decent rate of interest on bonds or from bank accounts but look at those juicy dividend yields from defensive shares over there!”

Valuations of defensive firms appear to be cycling down right now. I think we’re seeing an investor rotation out of pricey defensives, such as big pharmaceutical stocks, and into cheap-looking cyclicals, such as big banking stocks. The general economic outlook is quite good, and the valuations of cyclical firms have looked low for some time. But I think there is a good reason for the market assigning a low valuation to the big banks and other cyclical firms. The market knows their profits tend to cycle up and down, and profits have been high for the banks and other cyclicals for some time. So, I think the market is keeping a lid on big bank valuations right now in anticipation of profits cycling down again at some point.

Yet economies are doing well and interest rates are on the rise. One argument goes that banks thrive in a higher-interest-rate environment. Maybe so, but I’m not expecting interest rates to shoot the lights out in the current macro-cycle, and I’m not expecting the market to raise the valuations of banks to growth-style ratings. I am, however, expecting a cyclical plunge in banks share prices, profits and dividends at some point. Such an event may be years away, but it’s still a threat. To me, the compelling retirement investing opportunity hidden in the banks-versus-pharma stocks debate is with the pharmas, and I’m ready to pounce.

The post Should you invest in banking or pharma stocks for retirement right now? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, Barclays, HSBC Holdings, Lloyds Banking Group, and Shire. 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.