For income chasers seeking a slice of the banking sector, Lloyds Banking Group (LSE: LLOY) may appear a standout selection.
Just look at a gigantic 6% dividend yield for 2019 that leaves the 4.5% broader forward average for the FTSE 100 standing; plans to distribute dividends on a quarterly basis; and a robust balance sheet (with a CET1 ratio of 13.9% as of March), which prompts brokers to forecast another payout hike this year.
None of this matters a jot to me. I’m more worried about how Lloyds’ bottom line will fare in the near term and beyond as the UK economy implodes under the weight of Brexit. The bank is already suffering under the strain, with revenues growth grinding to a halt and the bad loans on its books rising (up 7% year-on-year in the first quarter).
Lloyds’ share price has contracted 13% over the past three months as conditions have toughened, and there’s plenty more reason to expect it to continue sliding as the British economy deteriorates. Why take a chance here when there’s much better, big-yielding banks to be bought today?
The Georgian era
Take Bank of Georgia Group (LSE: BGEO), for example. While Britain appears to be teetering on the brink of recession and in danger of a prolonged Brexit-related hangover, economic growth in the Eurasian nation continues to impress, and is predicted to keep doing so. The International Monetary Fund expects expansion of 4.6% for 2019 to improve to 4.8% next year and to 5% in 2021.
Little wonder, then, that Bank of Georgia’s revenues and pre-tax profits (excluding one-off termination payments to former executives) ballooned 10% and 11% in the first quarter, to 258.7m and 112.2m Georgian lari respectively.
Look, I understand that many investors might consider London’s centuries-old banking sector as a safer place for their money than that of an emerging market like Georgia. However, recent regulatory changes — like raising capital requirements and encouraging responsible lending — makes investment in the country’s banks a much safer proposition than a few years back.
Besides, I would argue that its forward P/E ratio of 5.3 times more than reflects any risks which Bank of Georgia offers up in the near term or beyond.
A better dividend stock
Any discussion about Lloyds isn’t complete without discussing its dividends. So here we go.
The bank’s payout policy set off like a train upon its resumption in 2014, but that electric payout growth has slowed significantly. City analysts expect expansion to remain rather sluggish, last year’s dividend of 3.21 per share expected to rise to just 3.4p in 2019.
Conversely, payouts at Bank of Georgia have ripped higher more recently, culminating in 2018’s total payout equivalent to 71p per share. It’s anticipated to rocket to 81p this year, too, resulting in a chubby 5% yield. And this is supported by the bank’s similarly robust balance sheet, which boasts a CET1 ratio of 12.7%.
So which is the better dividend pick? There’s no room for debate, in my book. Bank of Georgia may have the smaller near-term yield, but I believe it has the capacity to keep turbocharging dividends in the years ahead. Lloyds, on the other hand, may struggle to raise dividends at all should a prolonged and/or destructive Brexit process materialise and cause profits to slide. So give the British bank a miss, I say, and go income hunting in Georgia instead.
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Royston Wild has no position in any of the shares mentioned. 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