My ownership of Lloyds (LSE: LLOY) shares dates back further than my stake in Phoenix Group Holdings (LSE: PHNX). Both were bought using my standard stock screening process that looks at business growth potential, share valuation, and dividend yield.
But using the same methodology to adjust my holdings ahead of 2024 indicates I should favour Phoenix Group rather than Lloyds.
A risk to both stocks is another major financial crisis that might deter new client business and reduce liquidity. So why does Phoenix look like the better option today?
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Business growth potential
Lloyds’ H1 results showed a pre-tax profit increase of 23% year on year, to £3.9bn. Total income rose by 12% in the same period to £9bn, due primarily to higher net interest income.
Analysts’ expectations are that revenue and earnings will decrease by 0.4% and 10.1% a year, respectively. to end-2026.
Phoenix Group posted an H1 adjusted operating profit before tax of £266m, up from £254m in the same period last year. After tax, it recorded a loss of £245m, compared to a £1.258bn loss in H1 2022.
The results also showed a 106% year-on-year increase in incremental new business long-term cash generation — to £885m.
For 2023-25, the target is now £4.5bn, which will provide a huge war chest for generating further growth.
Analysts’ expectations are that revenue and earnings will respectively increase by 36.7% and 90.6% a year to end-2026.
Phoenix Group wins this category, in my view.
Share valuation
Lloyds’ price-to-book (P/B) ratio is 0.7, against its peer group average of 0.5. This comprises Barclays at 0.3, both NatWest and Standard Chartered at 0.5, and HSBC Holdings at 0.8.
It shows the bank to be slightly overvalued on this measurement.
Phoenix Group’s P/B is 1.5, compared to the 1.6 average of its peer group. This consist of Just Group (0.7), Chesnara (1.1), Prudential (1.7), and Legal & General (2.8).
So it is slightly undervalued on this metric, but there is not much in it.
To try to clarify the issue further, I used the discounted cash flow (DCF) model, using multiple analysts’ valuations.
The lowest of the range of assessments for Lloyds showed it as 28% undervalued, and Phoenix Group as 25% undervalued.
The results are still close, but in my view, it is a slight win for Lloyds in this category.
Dividend yield
In 2022, Lloyds paid 2.4p per share in dividends. With the share price at 46p now, this gives a yield of 5.2%.
Last year, Phoenix Group paid 50.8p. This gives a payout of 10.2%, based on the current £4.96 share price.
It should be noted that Lloyds had a higher dividend cover ratio than Phoenix Group over the past three years. A ratio above 2 is considered good, while below 1.5 indicates the risk of a dividend cut.
In 2020, Lloyds ratio was 2.11 (against Phoenix Group’s 1.93), and in 2021 it was 3.75 (against 1.62). Last year it was 3.04 (against 1.6).
However, this does not bother me at all, as Phoenix Group has maintained a ratio above 1.5.
Of course, dividend payouts and share prices will change, affecting the yields on both. However, right now, Phoenix Group’s is much better.
This gives it two clear wins out of three categories in my portfolio evaluation.
