Banking stocks were understandably the pariahs of the investment world for a few years. But theyre far stronger now than theyve been for decades, and yet sentiment has not recovered and there are some great bargains and attractive dividends to be had.
Look at Lloyds Banking Group (LSE: LLOY)(NYSE: LYG.US), for example. Its gone from a bailed-out wreck to a bank boasting a CET1 ratio of 12.8% by the end of 2014, and returned to paying a modest dividend that year. With the shares selling for 79p now, theres a dividend yield of 3.4% forecast for 2015. Thats not much better than the FTSE 100 average, but it would be three times covered by forecast earnings and theres a much bigger 5.2% predicted for 2016.
Chief executive Antnio Horta-Osrio told us that Over the last four years we have transformed Lloyds Banking Group into a low cost, low risk, UK focused retail and commercial bank, and to me that makes Lloyds a very attractive proposition right now. I just dont think well have many chances in the coming decades to lock in long-term dividend yields above 5% from the banking sector. On a P/E of only 10, I reckon Lloyds is undervalued.
Barclays (LSE: BARC)(NYSE: BCS.US) is on an even lower forward P/E, of a bit under nine based on 2016 forecasts, though its expected dividend yields are a little lower than Lloyds at 3.3% this year and 4.5% next on a 256p price. I think sentiment is against Barclays more than some of the others, based on its past misdemeanours and fears that more could come out of the woodwork in the coming years and lead to further fines.
But Barclays has always seemed like one of the best at maximising shareholder returns, and that ethos is still there and seems to be better directed these days. Results for 2014 showed a rise in EPS, and we have two more years of the same forecast and with profits rising, impairments and costs falling, and a CET1 ratio up to 10.3% (not as good as Lloyds, but good nevertheless), I see Barclays as a bit of a steal too.
HSBC Holdings (LSE: HSBA) is offering the best dividends of the three, if the Citys tips are accurate, with yields of 5.6% and 5.9% penciled in for this year and next, although with the shares at 600p were looking at a slightly higher P/E of 11.
But despite those tempting yields, HSBC surely carries more risk. Its very high exposed to any Chinese slowdown it hasnt materialized yet, but it still could. And there are some observers who see HSBC as perhaps a bit too big and thinly-spread, and not as well focused in some markets as it could be.
And theres the Switzerland issue, with HSBCs Swiss Private Bank under investigation for alleged offences for helping well-heeled clients to avoid taxes in 2006 and 2007.
On the whole, Im cautious about HSBC, but Lloyds and Barclays get my thumbs-up.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.