The Lloyds Banking Group (LSE: LLOY) share price has been a strong performer in the month to date. The FTSE 100 bank has risen 7% in value since the turn of March. And it’s back on the front foot as I type and moving towards recent one-year peaks.
The Lloyds share price still seems to offer tremendous value right now despite these gains, too. City experts reckon annual earnings at the UK bank will soar more than 220% year on year in 2021. This leaves it trading on a price-to-earnings (P/E) ratio of just 12 times. To add an extra sweetener, Lloyds boasts a meaty 4% dividend yield at current prices.
The good (and bad) news for Lloyds’ share price
Investor appetite for Lloyds has picked as the the outlook for the British economy has improved. Consider the words of Bank of England chief Andrew Bailey to the BBC this week. He said that there are “upside risks” to the BoE’s growth forecasts for 2020. And he expects the economy to recover to pre-pandemic levels by the end of the year.
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But it wasn’t all good news. Indeed, Bailey’s comments regarding lifting interest rates were more disappointing for the likes of Lloyds. Low interest rates have taken a huge bite out of banks’s profits over the past decade. And Bailey said that the Bank would not raise rates unless signs of a “sustained” rise in inflation — a scenario he throws huge doubt upon — become apparent.
So the Lloyds share price is certainly cheap. But I believe it remains cheap for a reason, and not just because I think low interest rates will remain around current record lows for years. I think bad loans and sluggish revenues at Lloyds could persist as the British economy struggles from the twin troubles of Brexit and a long Covid-19 adjustment.
A better cheap UK share I’d buy today
I don’t think that I need to take a gamble with Lloyds when there are so many other cheap UK shares for me to choose from anyway. For example, I’d much rather buy Royal Mail (LSE RMG). This is because I think the company’s e-commerce exposure should lift profits even if the economic rebound fails to materialise, providing investors with a safety net.
Royal Mail trades on a forward P/E ratio of 13 times. It carries a 3.5% dividend yield too. While these numbers might not be as impressive as those of Lloyds, I think its much lower risk profile merits a slight premium. Don’t forget that Royal Mail’s fast-growing GLS overseas division also gives the UK some foreign exposure. Lloyds has no overseas units to help profits in the event of a long and painful downturn for the British economy.
Weak consumer spending in the UK and Europe could dent parcel volumes at Royal Mail in the near term. But promisingly the company continues to expand its services to win market share and keep packages traffic roaring higher. All things considered I think the courier is a much more appealing UK value share than Lloyds.
