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Investors are buying Lloyds shares. I’d snap up this cheap FTSE 100 stock instead

Paul Summers
·4-min read
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Entrepreneurs women hands holding credit card.

Lloyds Bank (LSE: LLOY) shares were the third most popular buy from clients of investment platform Hargreaves Landsdown last week. The only stocks attracting (slightly) more attention were battered FTSE 100 peers Rolls-Royce and tech-focused Scottish Mortgage Investment Trust.

Personally, I’d much rather snap up a different lowly-valued company in London’s top tier. Before revealing its identity, however, here’s why I’m not rushing to join the queue for the battered bank.

Why I’m avoiding Lloyds shares

Perhaps the biggest reason, at least right now, is Brexit. The manner of our increasingly messy departure from the EU looks like being decided at the very last minute. Should the UK and EU fail to agree on a trade deal, I think it’s likely Lloyds will bear the brunt of the fallout. A likely reduction in economic growth could put pressure on its share price, at least until the dust settles.

A second reason I’m avoiding Lloyds shares relates to its exposure to the housing market. Being the UK’s biggest mortgage lender might not sound like a bad thing given how hot property currently is. Even so, I suspect it might get increasingly unattractive as the full economic impact of the coronavirus is felt.

The possibility of a third lockdown in January heaps yet more pressure on businesses. The extension of the furlough scheme until the end of April may soften the blow, but unemployment rates are surely still set to rise in the near term. This will put further strain on those already struggling to make their mortgage payments. Yes, another fall in interest rates might help but that’s also bad news for margins at Lloyds.

Third, Lloyd yields less than 1% at the moment. This is problematic for me since the sizeable pre-coronavirus dividend stream was one of the biggest attractions for holding the shares. I’m not as optimistic as others that this will be hiked significantly in FY21.

Taking all the above into account, I think there are far better ‘cheap’ stocks on the market right now.

Better FTSE 100 bet

One FTSE 100 stock I’d be far more interested in buying at the current time is pharmaceutical giant GlaxoSmithKline (LSE: GSK).

Glaxo is unlikely to be impacted by any political shenanigans in the same way as Lloyds. At the end of the day, people will always require what it produces, even if year-to-year earnings aren’t totally consistent. Moreover, its truly global geographical reach means Glaxo, unlike Lloyds, will benefit from a fall in the value of sterling in the event of no deal.

Then there’s the price. At less than 12 times expected FY21 earnings, GSK’s valuation feels dirt cheap to me for a major player in a highly defensive industry.

Another reason why I’d buy Glaxo over Lloyds shares is the possibility of further consolidation in the pharma space. AstraZeneca‘s planned merger with Alexion may push other giants to come knocking on Glaxo’s door in 2021.

A final motivation is income-related. A likely 80p per share return in this financial year gives a yield of 5.9%. For comparison, the best instant access Cash ISA available returns just 0.6% a year.

All told, Glaxo seems a far better FTSE 100 buy at the moment, I feel. Lloyds shares could still make me money over the long term, but I’m not sure my patience will stretch that far.

The post Investors are buying Lloyds shares. I’d snap up this cheap FTSE 100 stock instead appeared first on The Motley Fool UK.

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Paul Summers owns shares in Scottish Mortgage Investment Trust. The Motley Fool UK has recommended GlaxoSmithKline, Hargreaves Lansdown, and 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 2020