My ownership of Lloyds (LSE: LLOY) shares dates back much further than my holding in M&G (LSE: MNG).
Both were bought using my standard stock screening process that looks at business growth potential, share valuation, and dividend yield.
Using the same methodology, M&G looks like the much better option today to me.
Business growth potential
Lloyds’ H1 2023 results showed a pre-tax profit increase of 23% year on year, to £3.9bn. Total income rose by 12% in the same period to £9bn, due primarily to higher net interest income (NIM).
However, consensus analysts’ expectations are that UK interest rates have peaked and will fall from here.
This is the key risk for Lloyds, as it will cut its NIM dramatically over time, and its earnings with it.
Indeed, analysts’ expectations are that its revenue and earnings will fall respectively by 0.4% and 11.9% a year to end-2026.
Earnings per share (EPS) are expected to drop respectively by 4.9% a year to the same point.
M&G’s H1 2023 results showed adjusted profits before tax increased 31% to £390m year on year. Analysts’ expectations were for just £284m.
The results also showed it is on track to generate £2.5bn of operating capital by end-2024. This on its own can provide a powerful engine for further growth.
It will also allow M&G to bring down its debt levels, although debt remains the key risk for the shares. Its current debt-to-equity ratio is just over 2, but this has fallen over the past year from around 2.8. A healthy ratio is seen as being around 1 to 1.5 so it has some way to go.
Analysts’ forecasts are now for earnings and revenue to grow, respectively, by 39.6% and 118.6% a year to end-2026.
A clear win for M&G in this category, in my view.
Share valuation
Lloyds’ price-to-book (P/B) ratio is 0.6, against its peer group average of 0.5. This comprises Barclays at 0.3, Standard Chartered at 0.4, NatWest at 0.5, and HSBC Holdings at 0.8.
Therefore, the bank looks slightly overvalued on this measurement.
M&G’s P/B is 1.3, against a peer group average of 4.1 This comprises RIT Capital Partners’ at 0.8, Burford Capital at 1.5, St. James’s Place at 2.8, and Wise at 11.4.
Therefore, the global investment manager is very undervalued on this metric.
To work out by how much, I used the discounted cash flow (DCF) model. This showed the stock to be around 45% undervalued at its present price of £2.21.
So, a fair value would be around £4.02, although this does not necessarily mean it will ever reach that level.
Another big win for M&G in this category too.
Dividend yield
In 2022, Lloyds paid 2.4p per share in dividends. With the share price at 42p now, this gives a yield of 5.7%.
Last year, M&G paid a total dividend of 19.6p a share. With the share price at £2.21 now, this gives a yield of 8.9%.
Both compare favourably to the current average FTSE 100 yield of 3.9%.
However, it is another clear victory for M&G, giving it three wins out of three by a large margin.
I will keep my Lloyds shares, as they have a good yield, and may increase in value over time in my view.
But I shall certainly be looking to add to my holding in M&G stock very soon.
The post 1 dividend giant I’d buy more of over Lloyds now appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Simon Watkins has positions in Lloyds Banking Group Plc, M&g Plc, and NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc, Burford Capital, HSBC Holdings, Lloyds Banking Group Plc, M&g Plc, Standard Chartered Plc, and Wise Plc. 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.
