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In the red corner we have Rolls-Royce (LSE: RR.) shares. In the blue corner we have Lloyds Banking Group (LSE: LLOY). Let's see who wins as the best investment in my opinion.
Valuations and recent performance
Rolls-Royce shares have soared recently. As I write on Wednesday 13 December, they are trading at 299p, an increase of 232% over a 12 month period. They were trading at 90p this time last year. The pandemic brought the aviation industry to a standstill, and Rolls-Royce shares were struggling during that time.
Currently, Rolls-Royce shares trade with a price-earnings-growth (PEG) ratio of 0.9. A reading below one may indicate that a stock is undervalued.
The business has recovered well from the pandemic. Net income for the trailing 12 months is £1.5bn, a significant increase compared to pandemic levels. New CEO Tufan Erginbilgiç's focus on efficiency and transformation appears to be paying off.
Let's move on to Lloyds then. As I write, the shares are trading at 45p. This is the same price I would have bought them for this time last year. Economic woes have caused the shares to rise and fall in 2023. However, Lloyds shares have remained below 100p since the 2008 crash!
Using the price-to-earnings ratio, Lloyds shares appear to be good value for money at a multiple of five. He FTSE 100 The average is 14.
Lloyds is the UK's largest mortgage provider. Recent higher rates have helped boost yields, which has boosted cash reserves, but not stocks.
Industry Outlook
The aviation industry seems to be flourishing at the moment, which is reflected in the performance of players such as Rolls-Royce, BAE Systemsand Airbus to name a few. Travel demand has increased, which has helped.
By comparison, the financial services industry is a little sick. Higher interest rates, fighting inflation and the banking crisis in the United States have sparked legitimate fears of a recession. Add to that the fact that the UK property market is struggling due to these issues, and in my opinion there is a lot of uncertainty in the air.
Risks and my decision.
My biggest problem with Rolls-Royce stock is its inconsistent performance. Additionally, the company has a lot of debt on its books. Recent positive performance has helped offset some of that. However, with fuel costs rising and the potential for travel demand to fall if volatility continues, there are a few things I need to consider here.
As for Lloyds, it is harder than ever to get new business for the mortgage provider as interest rates are high and wages have not risen as much. Additionally, higher interest rates and increased payments may boost coffers now, but the chances of defaults and credit deterioration also increase. Could yields and cash flows fall when rates fall?
Despite these concerns, my winner is Lloyds shares. I believe the business is in a better financial position, with plenty of cash and an excellent position in the market. Your assessment is tempting. More importantly, it looks like a great passive income opportunity offering a dividend yield close to 6%. However, I am aware that dividends are never guaranteed.
Of the two, I would buy Lloyds shares today rather than Rolls-Royce shares if I had the cash to invest.
