Banking Wars: Barclays PLC vs Lloyds Banking Group PLC

I like Barclays PLC (LON: BARC), and I like Lloyds Banking Group PLC (LON: LLOY), but which is better?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I was shocked when I read full-year results from Barclays (LSE: BARC) and discovered it decided to slash its 2016 dividend by more than half, to yield less than 2% instead of the 4.4% tipsters had suggested. I was especially surprised as a few days earlier, Lloyds Banking Group (LSE: LLOY) had announced a better-than-expected dividend payout in its final results.

What’s interesting is that, though it dropped by 8% on the day of the results, in a couple of days Barclays’ share price recovered to 174.3p, higher than the pre-results price!

What to do now?

Barclays shareholders will still get the expected 6.5p per share for the year just ended and have time to adjust to the new regime, but should they sell now or hold? The latter! In my opinion Barclays is a strong buy.

Should you invest £1,000 in Manchester United Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Manchester United Plc made the list?

See the 6 stocks

The dividend cut is painful short term, but probably for the long-term best. The bank earmarked another £1.45bn to cover PPI misselling costs in the final quarter of 2015, is also separating its UK retail arm from its investment banking division, and is still engaged in longer-term cost-cutting. And it intends to return to decent dividend payments in due course.

Barclays shares are now on a forward P/E of just 7.5 for 2016, dropping to 6.6 based on 2017 forecasts — and with earnings expected to grow, we’re even looking at attractively low PEG ratios of 0.2 and 0.5, respectively. Even with lower dividends expected in the shorter term, how can that not be a screaming bargain?

Dividends on the up

Lloyds pleased the punters by announcing an extra 0.5p special dividend on top of its ordinary dividend of 2.25p per share. On a 73p share price, that’s a total yield of 3.8%, which is pretty good as 2015 was the bank’s first year of paying both interim and final dividends since the crunch ended. And it bodes well for the yields of 5.4% and 6.5% forecast for this year and next.

The PPI scandal hit taken by Lloyds is the biggest of them all, with £16bn having been set aside to cover it. But the bank reckons the £4bn for 2015 should be last instalment.

Lloyds doesn’t have EPS growth like Barclays on the cards for this year and next and the shares are on significantly higher P/E multiples of 9.7 and 9.5, respectively. But those are still significantly below the long-term FTSE 100 average of around 14, and for dividends that blow the FTSE average out of the water, that looks like a steal.

What I also like about Lloyds is that it’s tightly focused as a UK retail bank, echoing the divisional split that Barclays is engaged in, and it has avoided the disconnected, clutching-at-all-straws, banking model of the past.

Which to buy?

The dividend picture at Barclays is less attractive in the shorter term, but that’s reflected in the stock’s lower P/E multiple, which implies that if its dividend recovers to match Lloyds’, the shares could be valued around 40% higher.

On the other hand, that dividend at Lloyds looks hard to resist, even without short-term EPS growth. Overall, my money is (literally) on Lloyds, as it’s closer to its long-term structural aims, so giving more clarity and reduced uncertainty. But if I were looking to invest more cash in the sector, my eye might be on Barclays — I don’t think you can lose with either.

Should you buy Manchester United Plc now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »