Is Lloyds Banking Group plc an inspired — or insane — stock pick?

Royston Wild runs the rule over Lloyds Banking Group plc’s (LON: LLOY) investment prospects.

| 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.

It isn’t difficult to see why market appetite for Lloyds Banking Group (LSE: LLOY) has fallen through the floor in 2016.

The share price was already in deficit at the time of June’s referendum, with investors digesting the prospect of prolonged low interest rates in the UK. But the Brexit decision has really put the boot into Lloyds’ share value, the bank now dealing at a 28% discount to levels recorded at the start of the year.

The Bank of England has of course responded by slashing rates to fresh record lows. However, a recent uptick in data has suggested that the British economy may not be about to tip off a cliff, as some had widely predicted.

This has reduced speculation that another rate cut could be in the offing. Indeed, Monetary Policy Committee member Kristin Forbes played down the likelihood of another reduction in recent weeks by commenting that “the economy is experiencing some chop, but no tsunami.”

Forbes did add, however, that “the adverse winds could quickly pick up… and merit a stronger policy response.” Economic data has been extremely volatile since the vote, with gauges on the housing market, high street activity and business confidence all far from reassuring.

And the bad news has kept on coming for Lloyds. As if dealing with a potential cooldown in the British economy wasn’t enough to contend with, the Financial Conduct Authority added to Lloyds’ woes in August by stretching out a proposed PPI claims deadline to 2019, extending its prior suggestion of a 2018 cut-off.

All priced-in?

Still, many would argue that Lloyds’ troubles are more than baked-in at current prices. Indeed, predicted earnings declines of 14% and 13% in 2016 and 2017 respectively result in P/E ratings of 7.2 times and 8.3 times. These readings are far below the benchmark of 10 times one would expect of high-risk stocks.

And the City expects Lloyds to smash many of its rivals in the dividend stakes too. Payments of 3.1p and 3.5p per share are predicted for 2016 and 2017, yielding 5.8% and 6.6%. By comparison the FTSE 100 average stands closer to 3.5%.

No upturn in sight

However, the prospect of prolonged difficulties in the UK economy could bury the chances of any bottom-line turnaround at Lloyds, making investment in the bank still hard to justify regardless of these ultra-cheap multiples.

Besides, the jury remains very much out on whether Lloyds will be able to meet current dividend forecasts. Not only could sickly income growth and a further rise in PPI bills put paid to any hefty dividend lift, but the Bank of England’s guidance that British banks don’t lift dividends following July’s liquidity injection into the sector could prove another significant obstacle for dividend chasers.

I reckon the problems over at Lloyds are far too significant at the present time, and think the bank could be in for a long, hard slog in the years ahead.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »