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For the 2020s, could Lloyds Bank be the investment of the decade?

Kevin Godbold
New year 2020 celebration. Gold foil balloons

The FTSE 100’s Lloyds Banking Group (LSE: LLOY) sports many enticing indicators right now. For example, with the share price at 57p, the forward-looking earnings multiple for 2020 is just below 8, the anticipated dividend yield is around 6.2%, and the price-to-book value is about 0.8.

By those measures, Lloyds looks quite cheap. And City analysts seem to have settled into a routine of pencilling in double-digit percentage increases for the dividend, which could continue for years.

There could be prosperity ahead

Indeed, many believe we are on the threshold of a new era of economic prosperity in the UK. And when the macroeconomy does well, banks tend to do well too. That’s because a traditional banking business relies on its customers’ healthy enterprises and personal finances to thrive.

But the Lloyds share price has been flat-lining for many years. The wiggles up and down have been quite dramatic at times, but there hasn’t been any overall progress upwards. The share-price action has been sideways for around seven years. And all through that time, the finances and trading record have looked like they’ve been recovering after the great financial crisis we saw around 2007–08.

My guess is that many now-frustrated investors bought shares in Lloyds for the firm’s potential to recover. But instead of the nice recovery in the shares many expected, I reckon we’ve been seeing the valuation contract as the firm’s earnings rise.

The market is being rational

I think the stock market is being rational. Because just as Lloyds relies on vibrant customer finances to thrive itself, the reverse is also true – when the bank’s business customers and individuals run into financial difficulties, Lloyds’s business shrivels too. And that’s why some investors say that bank stocks are often the first into and the first out of recessions.

It’s true. Bank shares are some of the most cyclical shares you’ll come across. The merest hint of a recession around the corner will send the share price plunging. So, they will likely shoot up when the news is good, right? Well, yes, but only, I suspect, if they are in a depressed condition in the first place, such as at the bottom of a cyclical downturn after the price has plunged.

One day, the market will likely be correct

The trouble right now, as I see it, is that earnings have been robust for several years. I reckon the stock market is patiently waiting for the next downturn in the economy, which it “knows” will arrive. It just doesn’t know when! So, in the meantime, the market will likely keep nibbling away at the valuation it has assigned to Lloyds, to discount higher earnings.

One day, the stock market will probably be correct and all the dividends and earnings we’re seeing now will go out the window. If that happens, the shares will likely move lower. So I wouldn’t bother owning the shares today to collect that rising dividend. I could collect it for years only to see all those income gains wiped out by capital losses in the end if the price tanks later. I don’t believe Lloyds Banking Group will be the investment of the decade, that’s for sure.

The post For the 2020s, could Lloyds Bank be the investment of the decade? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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