Macquarie Group Ltd vs. the big banks: who represents better value?

It's hard to imagine but Macquarie Group Ltd (ASX:MQG) could potentially generate safer and less volatile returns than the big four banks. But is the stock a buy?

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All the focus is on the big banks after Warren Buffett added these stocks to his watch list but there's another bank stock that may offer more stable and fatter returns.

I am talking about Macquarie Group Ltd (ASX: MQG) and I know it sounds funny to many who have gone through the Global Financial Crisis (GFC) that the Australian investment bank can potentially generate safer returns than our premier residential mortgage lenders.

After all, didn't Commonwealth Bank of Australia (ASX: CBA) and co. come through the financial crisis looking like superstars?

Macquarie has learnt its lesson and the latest news that it is looking to spend another $US1 billion plus on mobile towers shows its left the securitisation market well behind.

Securitisation refers to the bundling and on-selling of cash flows from various assets to investors. This strategy used by Macquarie's United States counterparts was at the center of the GFC.

Investing in infrastructure that would pay a steady annuity-style return appears to be a key strategy for Macquarie following a report from Reuters that the investment bank is looking to lodge a bid to buy Brazilian mobile-phone tower operator Grupo TorreSur.

It is not clear if Macquarie is acting as part of a consortium or alone, but it is facing competition for Grupo TorreSur from American Tower Corp and others.

Recently, Macquarie led a group of investors to buy the largest independent network of Australian mobile towers from Crown Castle International for $2 billion.

The move by Macquarie towards a diversified portfolio of relatively low risk infrastructure assets comes at a time when there are growing concerns about the big four banks' exposure to the inflating domestic residential market.

The risk profile for the big four domestic banks is arguably higher than Macquarie and I can't think of a time when this has been true.

Having large leverage to one asset class in one country is proving to be a thorn in the side of the banks, particularly in this part of the economic cycle, yet Macquarie is trading on a 2015-16 consensus price-earnings multiple of 15x, which is similar to Commonwealth Bank.

This shows the market doesn't quite recognise the difference in the risk profiles and outlook for the two financial institutions.

I am not saying that the big bank stocks are a sell. Far from it, as I think they are looking attractive for the first time in the last year or so after the latest sell-off.

But Macquarie represents better value in my book, although its grossed-up yield is a little lower than Commonwealth Bank because of franking credits.

Both stocks have a 2015-16 forecast yield of a little over 5% but Macquarie's distributions are franked at 40% only, while all of Commonwealth Bank's dividends are franked.

This means you will be giving up a little over 1% in dividend yield by buying Macquarie, but it's a small price to pay in my view.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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