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Lloyds v RBS: which share price is the best defensive play?

Contrarian investor Alex Wright clearly thinks there isn’t much upside left in Lloyds’ share price. Last week this Fidelity fund manager sold £3 billion worth of Lloyds [LLOY] and other banking stocks, despite holding onto his stake in RBS [RBS].

This flies in the face of conventional wisdom that says the best defensive stock of the two is Lloyds. It has a higher dividend and hasn't been as volatile as the RBS share price.

Yet, for contrarians like Wright, when people say it’s time to buy, it's time to sell. And when a sell-off is being talked up, it's time to buy.

 

Why has Wright sold Lloyds and kept RBS?

  Lloyds RBS
Market cap £37.38bn £29.92bn
PE ratio (TTM) 9.73 8.93
EPS (TTM) 0.30 0.17
Return on equity (TTM) 8.83% 7.46%

Lloyds & RBS share price vitals, Yahoo finance, 1 October 2019

 

The problem as Wright sees it is that Lloyds no longer looks like it’s in control of its own fate. Acting as a bellwether for the UK economy limits the chances of its shares moving independently of macroeconomic events.

“I look to own companies in control of their own fate,” Wright said in a statement.

Instead Wright is backing RBS. According to the Fidelity fund manager it’s apparently in an “earlier stage of its recovery and still has room to go in its evolution towards becoming a high return bank with excess capital”.

So while RBS's share price is down 23% from a year-to-date peak, hit in March, Wright is taking the contrarian view in the hopes of a recovery. The stock accounts for 3.3% of his Special Situations fund.

‘For most banks there are few avenues left to offset the margin pressure. Most have little room left to cut costs and provisions are already at record lows,’ Wright said, explaining his decision to sell economically sensitive banking stocks.

 

How do the two stocks stack up?

Is Wright right in his analysis? Lloyds’ share price is currently down 6% year-on-year, and over a five-year period the stock has fallen roughly 29%. RBS is down over 16% year-on-year, and 43% over the five-year period. 

Yet on the earnings front, RBS saw a 497.10% jump in growth last quarter, while Lloyds dropped 10.5% year-on-year. Furthermore, RBS’s profit margin comes in at 27.47%, slightly ahead of Lloyds’ 24.81%.

Lloyds trades on a 9.73 price-to-earnings ratio, which is more expensive than RBS’s 8.93x. Although both appear undervalued on a price-to-book ratio too, RBS again comes in cheaper with a 0.54 score, relative to Lloyds’ 0.75.

But for income-seeking investors, Lloyds might have the edge. The stock carries a 5.93% forward dividend yield compared to RBS’s expected 1.88% yield.  

Other analysts see value in both stocks. Those tracking Lloyds’ share price on Yahoo Finance have given it an average price target of 75.37p. Hitting this would represent a 41% upside on the current share price. RBS has an average target of 301.06p, a 49% upside.

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