I’m going to use three key criteria — value, income, and growth — to compare companies to their sector peers. I’ve included some U.S. shares, as these provide U.K. investors with access to some of the world’s largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and, I feel, are outweighed by the investing potential of the American market.
Today, I’m going to take a look at two banks that were hit hard by the financial crisis but now appear to be on the road to recovery: Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Citigroup Inc. (NYSE:C).
1. Value
The easiest way to lose money on shares is to pay too much for them — so which share looks better value, Lloyds Banking Group PLC (ADR) (NYSE:LYG), or Citigroup?
| Value | Lloyds | Citigroup |
|---|---|---|
| Current price-to-earnings ratio (P/E) | n/a | 19.1 |
| Forecast P/E | 12.5 | 10.1 |
| Price-to-book ratio (P/B) | 0.8 | 0.8 |
| Price-to-sales ratio (P/S) | 0.9 | 2.1 |
It’s almost too close to call, here, with both banks trading at around 0.8 times their book value and on similar forward P/E ratios. However, Lloyds posted a statutory loss of 1.3 billion pounds for 2012, whereas Citigroup Inc. (NYSE:C) managed to deliver a $7.9bn profit, and has been profitable since 2010. For me, Citigroup’s proven profitability and its lower forward P/E ratio give it a slight edge over Lloyds in terms of value.
2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. Yet banks have become one of the worst places to look for yield, so do Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Citigroup have anything to offer income investors?
| Value | Lloyds | Citigroup |
|---|---|---|
| Current dividend yield | 0% | 0.1% |
| 5-year average historical yield | 2.2% | 5.3% |
| 5-year dividend average growth rate | n/a | -71.6% |
| 2013 forecast yield | 0.4% | 0.1% |
Once again, Citigroup Inc. (NYSE:C) appears to be further down the road of recovery than Lloyds. Although its $0.01-per-quarter dividend is pretty nominal, it passed a recent Federal Reserve stress test with flying colors and could have requested a dividend increase while remaining within Federal guidelines.
Citigroup’s CEO Michael Corbat has chosen not to pursue this route and to spend another year improving the bank’s capital position, but he had the choice — unlike Lloyds Banking Group PLC (ADR) (NYSE:LYG)’ board, which did not recommend a dividend in 2012, due to “regulatory uncertainty and the statutory loss in the year.” Consensus forecasts suggest that Lloyds might declare a small dividend in 2013, but in reality, this is just a mixture of guesswork and hope, as until Lloyds becomes sustainably profitable, it is unlikely to declare a dividend.
3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation — and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.
How do Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Citigroup Inc. (NYSE:C) shape up in terms of growth?
| Value | Lloyds | Citigroup |
|---|---|---|
| 5-year earnings-per-share growth rate | -280% | -14% |
| 5-year revenue growth rate | 6.9% | -10.9% |
| 5-year share price return | -87% | -76% |
| 3-year share price return | -13.2% | 19.6% |
Since the five-year share price return figures include the pre-financial crisis period, I’ve also added in a row for three-year share price return, which I think shows more clearly the difference between the two companies. There’s no clear winner between these two in terms of growth — both have profitable core businesses and legacy problems that are causing huge losses each year, but at present, Lloyds’ situation is worse.
Should you buy Lloyds or Citigroup?
In my view, Citigroup Inc. (NYSE:C) is considerably further along the road to recovery than Lloyds. Citi’s CEO Michael Corbat was appointed last year after the previous incumbent, Vikram Pandit, was encouraged to resign. Corbat has initiated wide-ranging changes that have seen the bank cut costs, reduce its headcount, and clearly define the non-core assets it wants to sell. Unlike at Lloyds, profits from Citi’s core business are big enough to outweigh its losses, which I believe should help Citigroup deliver strong returns to shareholders as its financial situation continues to strengthen.
My buy — for both income and growth — would be Citigroup Inc. (NYSE:C), but banks’ finances are notoriously complex, and if you would prefer a profitable business whose affairs are easier to understand, then you may want to take a look at the home-grown business I mention below, which has outperformed both Lloyds Banking Group PLC (ADR) (NYSE:LYG) and Citigroup by a big margin in recent years.
The article Can Lloyds Banking Outperform Citigroup? originally appeared on Fool.com and is written by Roland Head.
Roland does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Citigroup.
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