On the face of it there is plenty to like over at Lloyds Banking Group (LSE: LLOY), the financial giant ticking all the most important investor boxes.
Growth hunters celebrate City forecasts of earnings growth of 67% in 2018 over at the Black Horse Bank (even though a more modest 1% improvement is forecast for next year). These projections mean Lloyds can be picked up for next to nothing too, the firm sporting a forward P/E ratio of 9.1 times.
Meanwhile, those seeking chubby dividends bask in predicted rewards of 3.6p per share this year and 3.8p in 2019, up from 3.05p last year and figures that yield a terrific 5.3% and 5.6% respectively.
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However, I remain concerned by a variety of issues that could blow near-term profits forecasts off course as well as weigh on the FTSE 100 bank’s performance further out.
Too much risk
As my Foolish colleague Kevin Godbold recently pointed out, the cyclical nature of Lloyds’ operations means that earnings could come under severe pressure as the UK economy cools.
The Office for National Statistics revised down its growth figures for the fourth quarter of 2017 in recent weeks to 0.4%, and this backcloth of weak growth is in danger of persisting as the uncertain political and economic climate continues, potentially pushing down revenues progress at the bank and prompting a rise in the number of bad loans on its books.
This worrying outlook, allied with signs of moderating inflation, could also see the Bank of England fail to hike interest rates as often as City commentators have previously estimated in 2018 and beyond, causing an additional drag on Lloyds’ profits prospects.
There is also the little matter of PPI redress that continues to hang over the company. Lloyds booked another £1.7bn worth of provisions last year, a sum the bank said “reflects increased complaint levels” and which I believe should continue to mount ahead of the FCA’s claims deadline etched for the summer of 2019.
Safety first
I’d much rather sell out of Lloyds and stash the cash in another Footsie-quoted share instead, Halma (LSE: HLMA).
The safety equipment specialist has a long record of sustained earnings growth behind it and, unlike Lloyds, it has a wide geographic footprint that protects it against broader economic weakness in certain territories.
And revenues continue to rip higher across all of its major regions. Indeed, bar the UK, sales boomed by double-digit percentages in all of its key markets during April-September, led by the emerging nations of Asia where aggregate revenues leapt 20% year-on-year to £83.9m.
Sales are ripping higher thanks to the strength of organic demand as well as the contribution of Halma’s aggressive M&A-led growth strategy. The acquisitions continue to come thick and fast and, thanks to its robust balance sheet and exceptional balance sheet the earnings-boosting bolt-on buys look set to keep streaming.
City analysts are expecting Halma to deliver a 9% earnings improvement in the year to March 2018, and to follow this with a 10% advance in fiscal 2019. While current projections may leave the business dealing on a high prospective P/E ratio of 24.5 times for the upcoming year, I believe Halma’s rock-solid profits outlook merits such a premium.
