I reckon robust fundamentals and attractive valuations make Lloyds (LSE: LLOY), Legal & General (LSE: LGEN) and Schroders (LSE: SDR) attractive blue-chip buys right now. Of course, theres the small matter of tomorrows referendum but Ill come to that after looking at the three businesses.
Lloyds
Lloyds efficiency and profits mark it out as a cut above the UKs other big banks. Last years underlying return on equity of 15%, pre-tax profit of 8.1bn and earnings per share of 8.5p were impressive.
The shares have made a bit of ground this week, having been on the decline since late May, but nevertheless are 20% down from their 52-week high, putting the company on a bargain basement price-to-earnings (P/E) ratio of 8.3.
In addition to its earnings power, the Black Horse is the UKs strongest big bank and among the strongest in Europe, with a common equity tier 1 (CET1) ratio of 13%. Last years stress test by the Prudential Regulation Authority which assumed a 20% fall in house prices, a 30% crash in commercial property and unemployment peaking at over 9% estimated Lloyds CET1 at 9.5% in the trough of the stress, well above the safety threshold of 4.5%.
That test a pretty extreme scenario assumed a suspension of Lloyds dividend. While I dont see such a disaster round the corner, there could be bumps in the road that mean the dividend might not be quite as high as analyst forecasts of a 6.2% yield, rising to 7.2% next year.
Legal & General
Insurer Legal & General has a solid regulatory capital surplus and a strong business model, delivering annual earnings growth of around 10%. The shares havent been quite as badly hit by market jitters as Lloyds, but are still down 17% from their 52-week high.
Legal & General now trades on a current-year forecast P/E of 11.3, falling to 10.3 for 2017. Combine these inexpensive earnings ratings with forecast dividend yields of 6.3% rising to 6.7%, and this is another strong financial business with an attractive valuation.
Schroders
Asset manager Schroders has a long history of prudent management, built on a robust balance sheet. The company culture has produced an excellent dividend record, even through the financial crisis.
The shares are down 22% from their 52-week high and trade on a P/E of 14.7 with a dividend yield of 3.3%. However, if you buy the companys non-voting shares (ticker SDRC), which trade at a discount to the voting shares, the P/E falls to 11.1 and the yield rises to 4.4%.
Referendum
Its widely expected that the stock market will fall on a Leave vote and rally on a Remain vote. A poll of polls in the Telegraph today has the vote split 50:50. However, the weight of money with bookmakers and betting exchanges is strongly suggesting a Remain result. As I write, the odds on Remain are around 3/10 and on Leave 3/1.
I prefer money as a predictor toopinion polls (historys on my side), and I reckon strong businesses, such as Lloyds, L&G and Schroders, are well-worth buying today. Keeping some cash in reserve, or a bit of hedging with the bookies on Leave at 3/1, could mitigate against the vote going Brexits way.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
