Should I buy more Lloyds shares or this FTSE rival which yields 9.2% with a P/E of just 7.6?
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I'm happy with mine Lloyds (LSE: LLOY) shares. They are up 38.98% over the past year and are still showing a lot of forward movement. Throw in a trailing yield of 4.54%, and the trailing 12-month yield is 43.52%.
They are rising again today, boosted by news that consumer inflation has eased to just 1.7%, below the Bank of England's comfortable 2% target. This is good news for Lloyds, which is already the UK's biggest mortgage lender and should benefit as interest rates fall. Lower borrowing costs can also reduce credit defaults.
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The downside of rate cuts is that they could squeeze Lloyds' net interest margins, the difference between what banks pay for savings and what they charge borrowers. This fell to 2.98% in the last quarter of 2023, down from 3.08% in Q3.
Margins remain at 2.95% in Q1 2024, but the group still expects them to remain above 2.9% during the fiscal year.
Where Lloyds' share price moves next partly depends on the UK economy, which has stagnated over the summer, and the impact of Labour's Autumn Budget.
There is another concern, over the nature of the financial regulator's investigation into claims of mis-selling of car finance. The board has set aside £450m to pay claims but the final bill is not known. Either way, I'm not too worried. I've held my Lloyds shares for years, and expect to get a lot of dividend income and share price growth over that time.
Since the stock looks a decent value with a price-to-earnings ratio of 7.59 and a price-to-book ratio of 0.8, I was tempted to buy more. But then FTSE 100 rival HSBC Holdings share price (LSE: HSBA) caught my eye. It has even more impressive numbers, as my raw table shows.
| Lloyds Banking Group | HSBC Holdings share price | |
| Successive harvest | 4.54% | 7.22% |
| Weather yield | 5.5% | 9.2% |
| Forecast dividend cover | 2x | 1.5x |
| The trailing P/E ratio | 7.91x | 7.6x |
| Price-to-book ratio | 0.8 | 0.8 |
| Operating margin forecast | 40.5% | 49.2% |
| Get back the money spent | 14.6% | 14.6% |
HSBC has a trailing yield of 7.9%. Its forecast yield is a blockbuster 9.2%. That's well ahead of Lloyds, although the cover is 1.5 less.
Interestingly, both have the same price-to-book ratio of 0.8, and a return on equity of 14.6%. Forecast operating margins are slightly higher for HSBC, but both stocks are doing well in this regard.
Both offer excellent dividend yields
What my tables don't show is the potential risk/reward ratio, which is quite different. Lloyds is a strong, low-risk, UK-focused retail and small business banking service.
HSBC has all of China and Asia to target. However this does not automatically make it the most profitable investment. It was exposed to China's economic downturn. That partly explains why HSBC's share price has risen slightly by 2.54% over the past year, a fraction of the growth delivered by Lloyds.
HSBC is torn between the West and the East, as Western suspicions of the world's second largest economy grow. As risks go, I think this is a bad sell for small car funds.
I might buy some HSBC shares for diversification purposes, when I have the cash. But Lloyds will always play my number one banking sector and one of the favorite stocks in my entire portfolio.
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