1 dividend giant I’d buy over Lloyds shares for 2024

Looking ahead to 2024, Lloyds shares still look like a good buy to me, but I think another high-yielding dividend stock looks even better.

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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.

Created with Highcharts 11.4.3Lloyds Banking Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL14 Dec 201814 Dec 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

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.

Created with Highcharts 11.4.3Phoenix Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL14 Dec 201814 Dec 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

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.

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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.

Simon Watkins has positions in Legal & General Group Plc, Lloyds Banking Group Plc, NatWest Group Plc, and Phoenix Group Plc. The Motley Fool UK has recommended Barclays Plc, Chesnara Plc, Lloyds Banking Group Plc, Prudential Plc, and Standard Chartered 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.

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