How Will Lloyds Banking Group Plc Fare In 2014?

Should I invest in Lloyds Banking Group PLC (LON: LLOY) for 2014 and beyond?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

  • Prospects;
  • Risks;
  • Valuation.

Today, I’m looking at UK-focused financial services and banking company Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US).

Track record

With the shares at 83p, Lloyds’ market cap. is around £59,500 million.

This table summarises the firm’s recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue (£m) 16,195 45,297 44,044 26,843 38,906
Net cash from operations (£m) 33,841 (33,735) (2,037) 19,893 3,049
Adjusted earnings per share 10.1p 7.5p (0.5p) (4.1p) (2p)
Dividend per share 11.4p 0 0 0 0

1) Prospects

Lloyds has been one of my biggest investment lessons over the last few years. For that, I thank it. Looking back to the halcyon investment years in the middle of the last decade, Lloyds gave the impression of being a dependable old institution that investors could rely on for a steady stream of gradually rising dividends. “It’s a bank,” went the cry, “What could be safer than investing in a bank? They deal in money, for goodness sake!”

I’ll bet that impression didn’t fool investors with longer memories than me, for if you look back over the last century or so, banks have a regular habit of getting into the kind of trouble that the track record above advertises. So what does that mean, and what is the big lesson that Lloyds and other companies so effectively sunk into my block? Cyclicality, dear boy, cyclicality! Whatever I do investment wise now always starts with assessing a company against the backdrop of its cyclicality and that of its markets. Legendary US investor Peter Lynch is the best source I’ve yet discovered for getting to grips with that investing subject in his book Beating The Street.

In the recent third-quarter interim statement, Lloyds reckoned it is well on the way to becoming a better, simpler, lower risk bank, capable of delivering the products its customers need and the strong, sustainable returns expected by shareholders. The firm has been working hard on its turnaround, cutting costs, refocusing, selling off non-core assets, building up its capital ratios, the normal kind of thing. The figures are good, with underlying profit up 136% on a year ago.

However, the share price has been performing well too and, with the economy firmly returning to growth, it looks like ‘normal’ times ahead for Lloyds. Indeed, the CEO recently said, “We have now commenced discussions with the regulators regarding the timetable and conditions for future dividend payment.” Ahah! Now that does make me nervous about an investment in Lloyds now. Skip back to the top to see why.

2) Risks

I think the big annual share-price rises are probably over for Lloyds in this macro-economic cycle and investor-returns could be less spectacular from here. This is a turnaround that has turned, so what’s the investment proposition now? Well, macro-economic news is becoming increasingly good. We are heading towards the next cyclical peak and banking shares may start to adjust to accommodate peak earnings again, which means investors could see P/E compression and dividend yield expansion. Investors will be attracted to the dividend again; like moths to a flame, some might say.

But for me there’s another risk: I’ll never understand what’s going on in Lloyds’  business until after it has happened, which is too late when it comes to investing, as the share price will already have moved. Banking businesses lack transparency in my world, even though I’ve been investing for years. Banks like Lloyds are definitely outside my comfort zone and I reckon other private investors will feel similarly after trying to analyze the prospects and financial statements of public limited banking companies.

3) Valuation

At 83p, the shares are trading with a 62% premium to the last-reported tangible net asset value. Banks are most attractive when trading at a discount.

The forward P/E rating for 2015 is almost 11, and city analysts expect those earnings to cover a dividend payout around twice that year, implying that the forward dividend yield could be as high as about 4.6%.

What now?

To me, banks like Lloyds Banking Group are less attractive than they were a few years ago, around 2009. Banks are early cycle investments in my view and Lloyds’ big annual share-price up-moves look done in this cycle.

Although there’s still potential for earnings to increase a long way from here, P/E compression could drag on an investors total return result, and sitting in banks is risky when the unpredictable down-leg of the current macro-economic cycle arrives.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin does not own shares in Lloyds Banking Group.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »