Don’t you just hate it when one of your investments insists on staying at rock bottom?
That’s what’s happened to Lloyds Banking Group (LSE: LLOY) which I bought into some time ago, and I was shocked to look through the FTSE 100 today and discover that Lloyds shares are in the bottom few in terms of P/E ratios.
With the price having slid by 9% so far in 2018, the latest year-end forecasts for a 65% EPS rise put the shares on a forward P/E multiple of a lowly 7.7. And it would stay around the same level in 2019 if the predicted flat earnings that year come to pass.
To put that into perspective, it’s only a little above half the FTSE 100’s overall P/E rating of around 14, and that’s even with Lloyds expected to provide significantly better than average dividends — yields of 5.6% and 6.1% would soundly beat the Footsie’s 4.1%.
I like to buy shares when I think their P/E valuations are too low, but I get a bit twitchy when I see them carry on downwards.
Nothing moves it
Another thing that frustrates me is that no amount of good news seems to shift the share price.
First-half results in August revealed a 38% rise in statutory pre-tax profit and a 45% jump in earnings per share, leading to a dividend boost “in line with the board’s progressive and sustainable policy“? A brief upwards blip but then the slump resumed.
Or how about Lloyds’ £1bn share buyback programme? Companies engage in those when they have excess capital and, seeing their shares as significantly undervalued, decide that a buyback will provide better long-term shareholder value.
Lloyds’ latest buyback started on 8 March and was completed on 24 August, and what effect did it have on the share price? A 10% fall, that’s what.
Maybe a Brexit agreement (or even confirmation of a no-deal departure) might finally end the uncertainty, but right now I remain 20% down on my purchase price of three years ago. But at least the dividends have brought me to about break-even.
Second worst
Before the banking crisis I saw Lloyds as one of our better banks, and I became keen to buy some when I saw signs of recovery coming along quicker than I’d expected. I was especially pleased to see a modest dividend restored in 2014, and then go on to rise rapidly to today’s levels. Lloyds looked well ahead of Royal Bank of Scotland, the other one rescued by UK taxpayers, and I full expected a stronger share price performance.
But since January 2007, just before the storm was to hit, Lloyds shares have put in the second worst performance of the FTSE 100’s banking sector. The shares are still down 84%, which is only beaten in awfulness by a 96% loss from RBS — and RBS has taken four years longer to get back to paying dividends, expected this year.
My Motley Fool colleague Roland Head points to Lloyds’ UK retail focus which could expose it to cyclicality, and I think he’s right there.
But I remain convinced that Lloyds shares are too cheap, and I’m holding.
