Lloyds Banking Group (LSE: LLOY) has never been an appropriate pick for growth hunters. Certainly not in a post-financial-crisis era of low central bank interest rates and profit-crushing misconduct penalties.
What it lacked in growth however, it more than made up for in dividends. The fruits of huge restructuring, allied with the support offered by a resilient, strong economy gave it the financial firepower to increase annual dividends again and offer investors the chance to gobble up some truly handsome yields.
Just as a high tide lifts all boats, the market panic of the past six weeks has caused stocks both good and bad to crash through the floor. And at current prices, Lloyds offers a bulging 9.1% dividend yield for 2020. Is it too cheap to resist?
Fear factor
I’ve been fearful over the FTSE 100 firm since the fallout of the summer 2016 European Union referendum.
The prospect of a prolonged and painful withdrawal from the continental trading club promised massive short-to-medium-term profits turbulence for the likes of Lloyds. It threatened to put the cosh on profitability over a longer time horizon too as Britain adjusted to Brexit. I don’t think I was being overly bearish, either. The steady stream of disappointing trading data from across the banking sector is proof of this.
But the economic turbulence caused by Brexit pales into insignificance compared to the damage that the coronavirus promises to wreak on Lloyds and its peers. Certainly in the near term. It threatens to rock the domestic economy like nothing any of us have likely seen in our lifetimes, as forecasts from the Centre for Economics and Business Research (CEBR) suggest.
The body predicts that a 0.5% dip in national output in the first quarter of 2020 will worsen to a staggering 15% drop in the June quarter. This would represent the sharpest decline since 1997.
With consumer spending predicted to topple, unemployment rates set to boom and business investment tipped to dry up, the CEBR reckons that the UK economy will shrink by 4% over the whole of 2020.
What should you do?
City analysts don’t expect Lloyds and its progressive dividend to remain intact following the Covid-19 outbreak. They reckon that the annual dividend will be hacked back to around 3p per share from 3.37p in 2019.
But I worry that the banking colossus might be forced into even more swingeing cuts. Firstly, that predicted payout is covered just 1.7 times by anticipated earnings, below the widely-regarded security benchmark of 2 times.
Lloyds likely won’t have the balance sheet strength to make up for this shortfall either. In October it axed its share buyback programme in response to ballooning PPI-related financial penalties. The bank might have sailed through the worst of this particular saga, sure, but the fallout of the coronavirus tragedy threatens to cause even more chaos for its capital-building plans.
As I said earlier though, Covid-19 isn’t the only thing Lloyds investors need to contend with. Brexit also casts a cloud over the bank and its ability to keep paying market-beating dividends. So ignore that 9%+ dividend yield, I say. There’s a galaxy of stronger income shares for bargain hunters to load up on today.
