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Should I double down on the Lloyds share price?

Roland Head
·3-min read
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.

For many years, Lloyds Banking Group (LSE: LLOY) had a reputation as an income stalwart. But I’m a bit worried that this may have distracted investors, including me, from the fact that the Lloyds share price is now 90% lower than it was 20 years ago.

Today I want to explain why I think Lloyds does offer value, but I can’t bring myself to buy the shares.

A crushing disappointment

It takes a lot of dividend income to make up for such a dire share price performance. And to be honest, I don’t think Lloyds has delivered.

Great dividend stocks will deliver reliable, rising payouts over many years. In turn, this regular income growth will support a gradually rising share price.

One of the best examples in the FTSE 100 is consumer goods group Unilever, which hasn’t cut its dividend for more than 50 years. Over the last 20 years, Unilever’s share price has risen by about 390%. Despite this, the shares still offer a reasonable 3.1% dividend yield.

My investing life might be simpler if I just stuffed my portfolio with Unilever stock. But investing all your cash in one company is rarely a good idea. Things can and do go wrong. And as an outside shareholder, you probably won’t know until it’s too late.

I still want a bank

As the coronavirus pandemic gathered pace in April, the UK regulator forced all the big banks to suspend dividend payments. However, I think it’s fair to say that most of them could have afforded to pay dividends, while still handling the expected increase in bad debts.

I certainly think that Lloyds could have afforded its dividend, which is one reason why I’m considering the shares again now. I’m quite happy to have one bank in my portfolio as these institutions can be a good way to gain exposure to the wider economy of a country — in this case the UK.

Why Lloyds share price could be cheap

At 28p, Lloyds is currently valued at a 45% discount to its tangible net asset value of 51.6p per share. That’s pretty cheap, but of course there’s a reason for this. Well, two reasons.

A decade of low interest rates has left banks struggling to make much money from mainstream lending. Even so, Lloyds’ scale as the UK’s largest mortgage lender and one of its biggest high street banks meant that the group was doing better than its main rivals.

The pandemic changed all that. Lloyds might still be in a relatively strong position, but its profits are expected to head south this year. Unbelievably, interest rates have fallen even lower since March. And the likelihood of rising unemployment and a UK recession means that bad debts are expected to rise sharply.

City brokers expect Lloyds’ earnings to fall by about 70% this year. Dividend payments are expected to return in 2021, but forecasts suggest a much reduced payout of 1.5p per share — half the 2018 payout.

Even so, I think Lloyds shares do look cheap. The stock currently trades on just eight times 2021 forecast earnings, with a forecast yield of 5.4%.

My concern is that the bank’s limited profitability means its shares will stay cheap for a long time. Right now, I’m not confident enough to rate Lloyds as more than a hold.

The post Should I double down on the Lloyds share price? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group and Unilever. 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 2020