Best International Stock: Lloyds TSB

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There's nothing better than a good turnaround story. Like an athlete who stumbles only to rise again and win, Inside Value pick Lloyds TSB (NYSE: LYG  ) is a prime example of a great company that took some wrong turns and is now getting back on track. Investors who see the value in Lloyds will be able to pick up shares at a good price, lock in a nice dividend, and gain exposure to European markets.

Lloyds has an incredible history that goes all the way back to 1765. After becoming a leading commercial bank in the U.K., Lloyds expanded to Europe, the United States, South America, and New Zealand. This high-growth strategy caused the company to stumble in the 1990s. Since then, it has sold off foreign assets to focus on its core U.K. operations, bringing in Citibank veteran Eric Daniels to lead the turnaround effort. With the new strategy firmly in place, the market is beginning to recognize the potential of Lloyds' 15 million retail customers and significant market share.

Presently, Lloyds continues to streamline its U.K. operations. In December, it sold the underperforming Goldfish credit card to Morgan Stanley in order to focus on its own brand of cards. Some Wall Street analysts are also contemplating whether Lloyds will sell Scottish Widows, the insurance and wealth management firm, to further simplify the business.

Buzz about a Lloyds takeover has been rampant, causing a surge in the share price. The rumor mill has brought up varied names like JPMorganChase (NYSE: JPM  ) , Spanish bank BBVA, and even Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) as potential suitors. My Foolish colleague Vitaliy Katsenelson argued that Lloyds' valuable brand, AAA credit rating, and current valuation make it a prime takeover candidate.

I happen to agree with him, and I also think Lloyds is a great investment on its own. A quick comparison with U.K. competitors shows that Lloyds posts strong returns on equity and has a reasonable valuation relative to its peers. The 7% dividend yield is reason enough to like this stock, and it appears to be safe even as consumer credit declines in the U.K.

U.K. Bank TTM Ratios

ROE

P/E*

Lloyds TSB Group plc

22.1

13.9

HSBC Holdings plc (NYSE: HBC  )

15.9

16.9

Barclays plc (NYSE: BCS  )

18.8

14.6

Royal Bank of Scotland

13.0

12.4

*Data provided by Capital IQ, a division of Standard & Poor's. P/E numbers reported on a normalized basis to adjust for the impact of extraordinary items.

You can't ignore that an investment in Lloyds provides exposure to the U.K. and European markets. Sure, Europe isn't as exciting as China or India right now, but I believe that the market underestimates the EU's. The EU represents the world's largest economic area, with a GDP of more than $12 trillion. Growth in major EU powers like Germany, France, and the U.K. has been limited in the last few years, but we may see some benefits from integrated economies down the line. For that matter, Europe's aging populations should leave Lloyds' wholesale banking and life insurance divisions well-positioned for the foreseeable future.

Motley Fool analyst Phillip Durell recommended Lloyds as a value play back in 2004. Since then, the stock is up over 20%; in my opinion, it's still got significant potential. (You can see his valuation with a free trial of his Inside Value newsletter). Whether the takeover rumors prevail or the firm shores up its U.K. operations on its own, I believe Lloyds is a compelling international investment.

Check in with the other competitors:

Joseph Khattab does not have positions in any of the companies mentioned. JPMorgan Chase is aMotley Fool Income Investorrecommendation. The Fool has a disclosure policy.


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