Should You Sell Lloyds Banking Group PLC & Buy Aberdeen Asset Management plc?

Recent results suggest Aberdeen Asset Management plc (LON:ADN) could outperform Lloyds Banking Group PLC (LON:LLOY), suggests Roland Head.

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Shares in emerging markets-focused asset manager Aberdeen Asset Management (LSE: ADN) slipped nearly 3% lower this morning, after the firm unveiled its interim results.

However, having taken a look at the Aberdeen’s figures, I reckon that the Scottish firm could be a better buy than last week’s strong performer, Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), as I’ll explain in this article.

Aberdeen outflow

Aberdeen’s underlying pre-tax profits rose by 25% to £270.2m during the first half of the year, while the firm’s interim dividend was hiked by 11% to 7.5p.

Aberdeen also announced a £100m share buyback to return surplus capital to shareholders and said that its adjusted operating margin rose from 43% to 44.7% during the first half of the year.

In the face of all this good news, why did the shares fall? The only sour note in Aberdeen’s interim results was the continued net new business outflow of £11.3bn — translated, this means that customer withdrawals exceeded new deposits.

Aberdeen has suffered as a result of the recent poor performance of emerging market assets, but this trend could be starting to reverse. Despite the net outflow of funds, the total value of Aberdeen’s assets under management rose by 2.5% to £330.6bn at the end of March, compared to £323.3bn at the end of December.

Aberdeen is also taking steps to reduce its dependence on emerging markets: the firm’s acquisition of the Scottish Widows Investment Partnership last year has helped boost profits and improve diversity.

Analysts expect Aberdeen’s earnings per share to rise by around 33% this year, while the dividend is expected to rise by 10%, giving a forecast P/E of 13.5 and a prospective yield of 4.4%.

In my view, the firm’s shares are a buy.

Why would you sell Lloyds?

Lloyds issued a solid set of first-quarter results last week, trumpeting a 59% reduction in impairment charged, a 7% increase in net interest income and an increased CET1 ratio of 13.4%, considerably higher than most of its peers.

The bank’s chief executive António Horta-Osório also reiterated his intention to pay interim and final dividends in 2015.

Lloyds’ shares currently offer a prospective yield of 3.3%, rising to 5.1% next year, based on the latest City forecasts.

However, I suspect that most of the good news regarding Lloyds’ return to business as usual may now be in the price.

Although income seekers might do well to hold onto their Lloyds shares, I think growth opportunities will be relatively limited — especially following the enforced disposal of the TSB business, which reduced the value of Lloyds’ loan book by 5% and took 6% from total customer deposits.

The latest consensus estimates suggest that Lloyds’ earnings per share will rise by around 5% in 2016 — compared to 10% at Aberdeen. Similarly I expect Lloyds’ dividend growth to slow after 2016, when it is expected to account for more than half of Lloyds’ earnings per share.

In my view, Lloyds is quite fully valued at the moment, and while it remains a relatively low risk bank, I think growth prospects are more limited than at Aberdeen.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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