I’ve been banging on about Lloyds Banking Group (LSE: LLOY) for ages now, because I think it’s one of the best bargains in the whole of the FTSE 100.
Yet still the share price remains stubbornly low — and following the ‘leave’ result in the EU referendum, it’s crashed a lot lower. In fact, since the end of Thursday, Lloyds shares have lost a painful 28%, dropping to 52p. That’s painful for existing shareholders like me, but is Lloyds now a super bargain for new buyers?
Based on current forecasts, Lloyds shares are now on a forward P/E of under seven. Granted, those forecasts will probably be scaled back a little, but we really don’t have any idea of how badly, if at all, Lloyds’ business will actually be affected — although that uncertainty alone is enough to cause panic right now.
Dividends still on track?
Lloyds’ dividend has come storming back since the bank was allowed to resume payments in 2014. The cash only yielded 1% that year, but was up to 3.1% by 2015, and the share price drop has pushed forecast yields above 8% now — again, those were pre-referendum forecasts. Can the dividend be sustained? With final results released in February, the bank announced a special dividend on top of its ordinary dividend to redistribute surplus capital, and stressed its “progressive and sustainable” dividend policy, so even with Brexit on the cards we should assume there’ll be a cut.
PPI repayments are still hanging ponderously over Lloyds, as the bank with the biggest penalties to date. Only last month, the Financial Ombudsman Service revealed that PPI complaints were running at around 4,000 per week. And some analysts are suggesting Lloyds could be set for a further £2bn in repayments — and the bank set aside an extra £4bn as recently as in 2015. There are attempts to put a time limit on PPI claims, but that’s moving slowly and it’s likely to go on for at least another couple of years.
The overhang that is the government’s stake of around 10% is an issue, too. The planned sale has been postponed, but it will all be sold off in due course — and the prospect of so many new shares coming up is certainly helping hold back the open market price.
Putting aside Brexit for a moment, the rest of Lloyds’ fundamentals made the shares a firm buy for me, so what do I think now? Well, the net result has been huge uncertainty over Lloyds’ future performance, and in the words of Aviva boss Mark Wilson, “uncertainty is kryptonite to business“.
Maximum pessimism
But uncertainty can also be a great boon to long-term investors who can exploit it to snap up bargains, and I’m again drawn to Neil Woodford‘s words in the immediate aftermath of the referendum in which he opined that “it is not as negative a development as the market’s initial reaction appears to imply“.
And as he also told us that “In the longer term, it is my view that the trajectory of the UK economy, and more importantly the world economy, will not be influenced significantly by today’s outcome“, it’s clear that Mr Woodford’s strategy of investing in long-term cash-generative companies remains unchanged.
So if you’re not as risk averse as all those shorter-sighted managers, whose horizons barely extent beyond their next quarterly reports and how good they’ll look in the short-term market, then I say Lloyds shares are silly-cheap now that we’re surely at, or very close to, the point of maximum pessimism.
