What Shares To Buy Now

Market Comment

By David Kuo




One of the biggest problems stock market investors face is what shares to invest in. Even seasoned professionals have been known to run their fingers down the share price pages of the financial press looking for inspiration.

My first port of call is always the underperforming sectors. For example, on a year-to-date measure, the FTSE All-Share Bank Index has delivered a negative return of 5.9%. Compare that with the FTSE All-Share Index, which has crept ahead 2.6%.

Even on a twelve-month measure, banks, which make up a whopping 19% of the FTSE All-Share Index, have lagged the overall market. Since 21 April 2003, the FTSE All-Share Bank Index has returned 13%, which trails a 21% improvement in the FTSE All-Share Index over the same period.

Some pundits might argue that an annual return of 13% is good enough, and perhaps the bank sector may now be fully valued. However, closer inspection reveals many banks are still considerably less expensive than the overall market.

Currently banks are valued at around 14 times historical earnings and carry an average yield of 4.2%, which is also on an historical basis. Meanwhile, the FTSE All-Share Index is valued on an historical P/E of 18 and yields 3.1%. The valuations of all the mainstream banks on a forward basis, which is a far better measure, are shown in the table below. (They have been ranked in descending order of forecast yields)

Bank Price (p) Yield P/E
Lloyds TSB (LSE: LLOY.L - news - msgs) 423 8.8% 9.9
Bradford & Bingley (LSE: BB.L - news) 290 6.1% 9.4
Alliance & Leicester (LSE: AL.) 836 5.9% 9.5
Abbey National (LSE: ANL.L - news - msgs) 427 5.8% 12.1
HSBC (LSE: HSBA.L - news - msgs) 826 4.6% 13.7
Barclays (LSE: BARC) 502 4.6% 9.7
HBOS (LSE: HBOS (LSE: HBOS.L - news - msgs) ) 733 4.5% 9.1
Royal Bank of Scotland (LSE: RBS.L - news) 1703 3.6% 9.5
Northern Rock (LSE: NRK.L - news - msgs) 762 3.6% 9.8
Standard Chartered (LSE: STAN.L - news - msgs) 884 3.6% 14.9




In terms of their prospective yields, the banks are ostensibly cheap. In some case, the yields are even better than the interest rates that can be earned from the banks' own deposit accounts! Naturally, there are well-founded concerns that impending hikes in the cost of borrowing could affect both consumers' and businesses' appetite to borrow money.


Additionally, increases in interest rates could narrow the difference between the returns available from bank deposit accounts, which are almost risk free, and dividend yields. However, it is worth bearing in mind that any hike in interest rates could also improve the margins that banks make. (Margin is the difference between the interest banks charge for lending and the rates they pay to their depositors.)


Of the ten banks, Lloyds TSB is by far the highest yielding in the UK market. Abbey National, Alliance & Leicester and Bradford & Bingley are also quite high yielding, though their large exposure to the precarious UK mortgage market has been noted.


Personally, I like the look of HSBC, Barclays (LSE: BARC.L - news - msgs) , HBOS and Royal Bank of Scotland. Of the four, HBOS is the cheapest though its yield is a smidgen lower than both Barclays and HSBC. Royal Bank of Scotland is also quite cheap, however its dividend yield is slightly less tempting.

hlyeo98,morning i`ve held this stock about 18 months now i payed 3.66 i think with in about 6 months of owning it was allmost 5.oo,,i was hopeing for around 5.50/6.oo a fair price.i`ve had a good divi since buying,but sadly i bought as a recovery stock,and not for the divi.now the share price as gone south again,there still seems not alot of intrest in the black horse,regards dd.

best of luck in the banking sector,,,you may need it..

has anybody any news of a approach by city group for TSB

Finally, I've been hoping for this since last year when the ceo came from there, in profit but not a lot, a little write up in the express and i think bloomberg are mentioning it, don't know if it's on telly but hope it is.

It could do an "Abbey" so I just may sell next week,depends on how credible the rumours are.

Please please go up Horsey (losing too much on Amvescap)

they're mentioning it on Bloomberg TV, I think I'm gonna go out and buy a plasma screen (i can always return it if it doesn't move, but I can't waste this great feeling)

great news,, lets hope there`s substance to the story..

"the Financial Sunday Express reported, citing an unidentified person "

I'd take more notice of The Beano than that rag ;-)

Has Gnasher been able to get an interview with Eric Daniels?


oh well, it made my day yesterday, now it's back to ignoring the market and hoping I have more money at the end of the week than I have now.

Good Luck other holders.