Lloyds Banking Group vs HSBC: which is the better FTSE 100 high yield stock?

A colourful firework display
A colourful firework display

There's plenty of banking stocks on the FTSE 100 that are expected to dole out market-beating dividends over the next couple of years.

On account of the size of their yields, though, Lloyds Banking Group (LSE: LLOY) and HSBC Holdings (LSE: HSBA) grab much of the attention. But which is the best for income chasers?

Lloyds edges the yield battle

Since Lloyds reinstated the dividend in 2014, a combination of solid earnings growth and further balance sheet rebuilding has seen payouts balloon.

The dividend sprinted to 3.05p per share in 2018 from 0.75p four years earlier, and City analysts expect payouts to keep swelling at a healthy rate. Dividends of 3.4p and 3.7p are forecast for 2018 and 2019 respectively, resulting in jumbo dividends of 5.5% and 6% for these years.

But HSBC has been forced to keep the dividend locked around 51 US cents per share over the past few years. And City brokers are expecting the full year reward to remain frozen through to the close of 2019. This means HSBC offers a less appealing yield of 5.3% through this period.

HSBC claims the balance sheet contest

In terms of the strongest balance sheet, latest quarterly figures showed Lloyds' CET1 ratio stood at a robust 14.1% as of the end of March, up 20 basis points from the start of the year and bolting through the minimum Basel III requirement.

This was pipped by HSBC's figure of 14.4% that stood as of the close of the first quarter, albeit down fractionally from 14.5% at the beginning of January.

But both sailed comfortably through the Bank of England's stress tests last autumn. So investors should have no fears over the health of either firm's balance sheet.

Profits forecasts: neck-and-neck

What about earnings forecasts? Well, like the yield, the race is close in the medium term at least, or so broker forecasts would suggest.

In 2018, HSBC is expected to record a 52% profits rise versus 66% for Lloyds. However, HSBC strikes back with a projected 3% bottom-line improvement for next year against a 2% rise forecast at Lloyds.

In terms of value, Lloyds could be considered a more attractive pick relative to its anticipated growth trajectory, the business dealing on a forward P/E ratio of 8.5 times below the accepted value territory of 15 times and below. While HSBC also deals inside this threshold it carries an inferior earnings multiple of 13.1 times.

... though HSBC's long-term outlook is more secure

That being said, Lloyds' lower rating reflects the more likely possibility of its medium-term forecasts being blown off course than those of its competitor.

As I noted last time out, a steady cooling of the UK economy means that The Black Horse Bank may well end up disappointing on the earnings front, its lack of overseas diversification compounding the problem. What's more, a catastrophic British exit from the European Union could extend these troubling trading conditions long into the future, a scenario that could seriously constrain dividend growth further down the line.

By comparison, I consider HSBC's profits outlook to be on a much stronger footing. The company sources the lion's share of profits from foreign marketplaces, including a stonking 80% from the emerging markets of Asia. And a backdrop of rising population levels and booming disposable incomes in these nations in particular should provide the bedrock for solid profits and thus dividend expansion long into the future.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.