The FTSE 100 index is getting weaker, but there’s a silver lining. And that comes quite unexpectedly, from the banks. According to news reports, banks could start paying dividends soon. Some investors may recall that banks were asked by the Bank of England (BoE) to suspend dividends after the stock market crash and the UK went into lockdown. This of course, included Lloyds Bank (LSE: LLOY). The Lloyds share price crashed on this development, indicating that the bank’s high dividend yield was the main attraction for many investors.
Lloyds share price dragged down for many reasons
Things have only gotten worse since. The UK economy went into a recession, the pandemic still hasn’t been controlled, the bank has been accused of mis-selling, there’s likelihood that account holders with LLOY won’t be able to access them in the EU after Brexit, and there’s also speculation that the BoE will set negative interest rates, which can have huge implications for banks. As a result, in September, the Lloyds share price fell to the lowest levels this year.
The BoE will decide whether or not it’s advisable for commercial banks to start paying out dividends again in the next three months. Going by its optimism, it could just do that. The bank’s Chief Economist, Andy Haldane, has long been optimistic about the UK economy’s prospects and expects a V-shaped recovery. In line with that, the BoE expects 20% growth for the July–September quarter. This would pretty much bring the economy back to its pre-lockdown levels. In other words, a V-shaped recovery is indeed here.
Is this a good time to buy?
So, would I buy the Lloyds Bank stock now? Not now, would be my answer. We can expect the BoE to make a verdict on banks’ dividends latest by the end of this year. Assuming that it does give a green light, the next question is whether Lloyds will necessarily start paying dividends then. Many FTSE 100 companies have paused dividend payouts because of the unclear economic outlook. And that goes for LLOY as well. In fact, it is especially true for banks, which are particularly impacted by weakness in the economy.
Even if Lloyds does start paying dividends, will the share price rise? In the short term it could bounce back, and it probably will. But here at The Motley Fool, we are all about long-term investing. If an indicator of the future is the past, I’m not hopeful. This FTSE 100 share’s price hasn’t gone anywhere in years. Even if it pays dividends, but erodes capital, is it worth it?
The take away
I’d put the Lloyds Bank share on my watchlist for now. If BoE gives banks a go ahead to pay dividends, I’d like to know when LLOY would actually stary paying them and the amount. Further, its reaction to the other issues mentioned above (and hopefully a resolution) would add to the stock’s merits. For now, I’m focusing on FTSE 100 stocks that offer both dividends and growth.
The post Lloyds share price: Is the worst over for the FTSE 100 share? Here’s what I think appeared first on The Motley Fool UK.
Manika Premsingh has no position in any of the shares 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.
Motley Fool UK 2020