I may remain über-bearish on Lloyds Banking Group, but I can still understand why it’s tempting for many investors.
A forward P/E ratio below the bargain-basement threshold of 10 times and a staggering prospective dividend yield north of 6%? For glass-half-full individuals who are not so fearful over the consequences of Brexit in the near term and beyond, there’s plenty to get your teeth into.
I am concerned about the fate of Lloyds and UK GDP data released today showed why why, the Office for National Statistics reporting a 1.4% rise in economic output in 2018 — the worst result for six years — and output in December actually falling 0.4%. For a bank whose bottom line is chiefly reliant upon a strong British economy, signs of such negative momentum in the run-up to Brexit makes for yet more chilling reading.
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So I would argue: why take a chance with Lloyds when you can get great value as well as bigger dividend yields with Bovis Homes Group (LSE: BVS)?
On the face of it, this FTSE 250 firm faces the same problems as Lloyds, i.e. UK-focused operations and thus a dependence upon a resilient economy to drive profits. However, I am confident that the country’s massive homes shortfall should still help Bovis’s profits to thrive, even if tough economic conditions have brought the curtain down on the stratospheric home price growth of yesteryear.
The positive trading updates that continue to pour in from the housebuilding sector pay testament to this. Bovis itself declared in January that it enjoyed “[a] record year of profits slightly ahead of market consensus” and that signs so far in 2019 are “encouraging.” What’s more, it said that forward sales remained at a robust 2,681 units last year versus 2,656 in the prior period, and that in 2018 it witnessed “a significant step-up in operating margin.” It is a particularly encouraging development that should support profits even in the event of a slowdown in new-build demand.
All of this results in City analysts predicting another year of profits growth in 2019, this time to the tune of 4%. Not spectacular, but remember this: that consensus reading results in a rock-bottom forward P/E multiple of 9.9 times. It means that Bovis is expected to keep doling out the special dividends as well, creating a monster dividend yield of 9.8%, which blows Lloyds’s 2019 reading clean out of the water
Salute this dividend star
One doesn’t have to look outside the FTSE 100 to find bigger yielders than Lloyds, though. Admiral Group (LSE: ADM) sports a forward yield of 6.5% and, like the banking giant, is also pretty reasonably priced thanks, as indicated by its prospective P/E rating of 15.4 times.
I’d prefer to buy the car insurance colossus, though. It’s expected to report a 7% profits rise in 2019 compared with Lloyds’ predictions of no growth at all. It’s not difficult to imagine earnings at Admiral continuing to soar either as customer numbers across its product lines boom (up 17% in the first half of 2018 to 5.1m), thanks in no small part to its ability to grab market share. With its operations in mainland Europe also going from strength to strength, I fully expect the business to keep delivering knockout shareholder returns well beyond the near term.
