Lloyds Banking Group (LSE: LLOY) is one of the most popular stocks for retail investors in the UK. And with the bank still way off its all-time highs and potentially offering a sizeable dividend yield, it’s easy to understand just why Lloyds is such a popular investment.
However, today I’m looking at another financial services company, Close Brothers Group (LSE: CBG), a bank that has performed very well for shareholders over the last few years and one that I believe could offer an interesting investment alternative to Lloyds.
Consistent performer
Close Brothers provides lending, deposit taking, securities trading and wealth management services to its clients and the consistency of the bank’s profits over the last few years has been impressive. Revenue, earnings and dividends have grown each year since 2011 and as a result, the bank’s share price has risen strongly over the last five years, returning 114% before dividends. Add in the dividend that has grown from 40p per share in FY2011 to 53.5p per share for FY2015 and Close Brothers has been an investor’s dream.
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Results at Lloyds over the same time haven’t been nearly as impressive. Lloyd’s FY2015 revenue was almost 40% lower than revenue in FY2013, earnings were negative in FY2011 and FY2012 and it was only in FY2014 that the bank resumed its dividend payments to shareholders. Lloyds’ share price has still managed to climb 72% over the last five years but in terms of consistency, Close Brothers Group has beaten Lloyds hands down.
Valuation
Close Brothers shares saw a dramatic fall immediately after the Brexit result, but have since rebounded and now trade around 6% higher than before the referendum. At the current share price they trade on a P/E ratio of 12.1 and yield 3.7% on those dividends of 53.5p per share for FY2015.
By contrast, Lloyds’ share price was clobbered after the EU Referendum result and while it has recovered slightly from its 47p low in July to 56p, it’s still over 20% below its pre-Brexit vote price. The bank now trades on a P/E of just 8.6 and on last year’s regular dividends of 2.25p per share, yields 4%.
On these metrics, Lloyds certainly looks the cheaper bank, but is it cheap for a reason?
Analyst forecasts
City analysts forecast Close Brothers to grow earnings by 3% and -5% over the next two years and dividends are expected to grow 6% and 5% in that time. By comparison, analysts see earnings falling 13% and 14% at Lloyds, however dividends are expected to grow an impressive 39% and 12% in that time.
So where does that leave us?
To my mind, Close Brothers Group could make an excellent portfolio holding for investors with a preference for consistency in earnings and dividends. It must be noted that the bank’s share price has spiked over 40% since its Brexit lows and as such, it might be worth waiting for a pullback before buying. Lloyds Banking Group is probably more suited to investors with a higher tolerance for earnings volatility. But I do believe that if management can deliver on dividend growth, shareholders should be rewarded over the long term.
