With the Brexit issue far from resolved, investment in domestically-focused banks like Lloyds Banking Group (LSE: LLOY) remains extremely risky business. Far too risky, in my book.
The FTSE 100 bank has already seen business hit as a result of the uncertainty created by the UK’s protracted exit from the European Union. And the outlook for Lloyds remains as clear as mud, with everything from a lengthy Article 50 extension to a catastrophic ‘no-deal’ Brexit still on the table, issues that threaten to harm profits growth at the firm in the near term and beyond.
Economic data for the UK continues to make for grim reading for the banking giant, the latest Office for National Statistics report showing GDP expanded just 0.3% in the first quarter, with the positive-but-artificial impact of Brexit-related stockpiling thought to have played a large part in this limp rise.
Such growth could well be considered a thing to behold in the near future, though. Indeed, in the event of a no-deal Brexit being signed off, the International Monetary Fund predicts a British recession that could last as long as two years.
For these reasons I’d be content to forget about Lloyds, about its compelling forward P/E ratio of 8.8 times which (on paper at least) suggests stunning value, and its bulging dividend yields of 5.1% and 5.4% for 2019 and 2020 respectively.
The Footsie bank is dirt-cheap for a reason. The possibility of City forecasts being blown wildly off course, estimates that suggest a 38% earnings rise in 2019 alone, is extremely high in the current economic and political landscape, and so are the chances of profits creation disappointing well into the next decade.
A better dividend buy
I do not see the point of gambling on Lloyds, when there are plenty of other blue-chips with stronger earnings outlooks not clouded by the spectre of Brexit. Take Cineworld Group (LSE: CINE), for example.
Britons may not have as much to spend in the current economic climate, but a trip to the cinema is a relatively inexpensive pursuit and so I’m not expecting box office takings at the multiplex operator to fall off a cliff, however our European Union exit goes. In fact, supported by the steady stream of blockbusters from Tinseltown — irresistible catnip for modern movie fans — as well as Cineworld’s ongoing cinema building programme I’m fully expecting profits to keep on swelling.
But if you’re still concerned over how Brexit will impact takings, I would urge you to consider Cineworld’s expansion into foreign territories, and more recently its takeover of US chain Regal Entertainment, as reasons to be optimistic. Its move into the North American market helped adjusted EBITDA on a pro-forma basis swell 9.4% to $1.07bn in 2018, illustrating the enormous profits potential of this one territory.
It’s not a shock that City analysts are predicting that earnings will swell 21% in 2019 alone, or that dividend yields sit at a chubby 4.3% for this year and 4.6% for 2020 thanks to expectations that payouts will keep climbing through this period. It doesn’t trouble me that these figures are less appealing than those over at Lloyds, just like the FTSE 250 firm’s forward P/E ratio of 12.6 times. In my opinion it’s a far superior stock to buy today.
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Royston Wild owns shares of Cineworld Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.
Motley Fool UK 2019