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National Australia Bank Ltd. or Suncorp Group Ltd: Which is the better buy?

Since the start of 2014 the share price performances of National Australia Bank Ltd. (ASX: NAB) and Suncorp Group Ltd (ASX: SUN) have been markedly different. While Suncorp, the smaller of the two with a market cap of $19 billion, has seen its share price rise by 11% year-to-date, shares in NAB (which has a market cap of $82 billion) are down 1% over the same time period.

Looking ahead, then, can Suncorp continue to outperform its larger peer, or is NAB now the better value of the two financial plays?

Super yields

With Aussie interest rates being just 2.5% and there being a decent chance that they could move lower before they move higher, dividends are becoming an even more important consideration for most investors. On this front, both Suncorp and NAB impress. They both offer fat, fully franked yields of 5.7%, which easily beat the ASX’s yield of 4.5% and should help to bolster the total returns of investors in both stocks moving forward.

Valuation

However, where the two financial stocks differ markedly is in terms of their current valuations. While NAB trades at a discount to the wider market, with it having a P/E ratio of 13.3 versus 15.8 for the ASX, Suncorp’s P/E ratio is far higher at 22.1. Therefore, value investors may be put off by Suncorp’s higher rating, although it must be noted that the company is forecast to increase earnings at a staggering rate in the current year.

Indeed, Suncorp’s bottom line is due to increase by 81% in the current year and, using expected EPS for FY 2015, shares in the company currently have a forward P/E of 14.2. While far more attractive than 22.1, it is still higher than NAB’s P/E ratio of 13.3.

Growth potential

As mentioned, Suncorp’s EPS is set to rise at a very rapid rate this year before it settles to a more pedestrian growth rate of 5.3% next year. This is generally in-line with the wider index growth rate, although it is below the 6.2% annualised rate that NAB is forecast to post over the next two years. Therefore, investors who are seeking a higher and more stable earnings growth profile could be better served by NAB than Suncorp. Certainly, the latter has superb prospects for the current year, but it seems unlikely to repeat anything like this level of growth in FY 2016.

Looking ahead

As a result, NAB seems to offer a steadier and more reliable outlook than its financial peer. Allied to this is an equally strong yield and a more attractive valuation which means that, overall, NAB could prove to be a better investment than Suncorp over the long term.

Of course, both companies are likely to experience some ups and downs moving forward. For instance, NAB’s UK exposure could cause it a potential headache, while Suncorp is reportedly keen to grow its banking division following talks with Bank of Queensland Limited (ASX: BOQ) regarding a potential tie-up. Therefore, if you own financial stocks, it could be well-worth reading a special free report from The Motley Fool.

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Motley Fool contributor Peter Stephens does not own shares in any of the companies mentioned.

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