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3 reasons why I believe Lloyds Bank is a value trap

Vishesh Raisinghani
Bad apple with good apples

Lloyds Banking Group’s (LSE: LLOY) stock has been in purgatory for nearly a decade. The stock is trading at 48.74p today, the exact same price it reached in March, 2009. It may be fair to say that the company has been teetering on the edge ever since the great financial crisis. 

Nevertheless, the banking group keeps chugging along. It’s a profitable entity with an extensive network of branches across the country and over 30m customers, impacting many aspects of their lives apart from just traditional banking. For instance, according to statistics published on its website, one in three new-build properties are funded by the group. Perhaps the most striking aspect of the stock is its sizable dividend yield, which is currently hovering around 6%. 

However, I remain sceptical of Lloyds’ prospects. Here are three reasons I wouldn’t add this high-dividend stock to my passive income portfolio:

Brexit

Unlike most major banks in the developed world, Lloyds is stubbornly domestic. The business is deeply intertwined with the British economy.  

With Brexit looming just months away and the latest gross domestic product numbers coming in below expectations, it seems the economy is due for considerable pain. I believe this pain will be rapidly reflected on the group’s balance sheet. 

Weak global growth

Trouble is compounded by the fact that the global economy is slowing down as well. According to the International Monetary Fund (IMF), global growth has suffered as a result of the ongoing trade war between the two largest economies on the planet. 

Slower global growth could have negative consequences for trade-dependent Britain. According to data published by Schroders, only 28.9% of the FTSE 100’s total revenue is generated domestically. The rest is earned overseas. Any dent in this revenue will have a knock-on effect on employment and consumer confidence across the country. 

If consumers are earning and spending less, I expect the bank’s major mortgage and lending business to suffer.  

Uncertain future

I could be wrong about the two predictions I’ve made in this article. Brexit could be smoother than my expectations and global growth could be surprisingly strong. However, the lingering uncertainty about the bank’s underlying fundamentals and ability to grow and return capital is a concern for me as a passive investor. 

This stock has been extremely volatile over the past few years, and the next few years are just as hard for me to predict. That means Lloyds Banking Group isn’t a stock I can hold in my portfolio and sleep peacefully.  

For long-term passive income, I believe predictability is crucial. Diageo, for example, is my passive income favourite because the company’s management has already promised to deliver £4.5bn in share buybacks over the next few years. That sort of reliability wins me over. 

Bottom line

I’m wary of Lloyds because the bank is too exposed to domestic economic woes and isn’t as predictable as some other major stocks. As a passive income investor, I’m willing to sacrifice a high yield for better predictability, which is why this share stays off my portfolio Buy list. 

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VisheshR has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, Diageo, and 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.

Motley Fool UK 2019