Financial giant Lloyds (LSE: LLOY) continued its ascent from recent three-year troughs in August, the stock leaping 12% during the course of the month.
Fears over the fate of Britain in a post-EU landscape have moderated in recent weeks, leading many to wonder whether concerns over Lloyds’ retail banking operations have been overcooked.
But I believe investors shouldn’t read too much into Lloyds’ giddy ascent. Indeed, I reckon there are plenty of obstacles that could prevent the bank returning to the levels enjoyed before June’s referendum (the stock still deals at a 17% discount to pre-vote prices).
Prolonged uncertainty?
Economic indicators have surprised to the upside in August, with retail sales and consumer confidence numbers — and just this week PMI data from the construction and manufacturing segments — picking up from the dreary readings immediately following the referendum.
But the detrimental impact of Brexit on the UK economy is likely to be more ‘slow burn’ than ‘car crash’, meaning that Lloyds is far from out of the woods.
The rift running through the governing Conservative Party over the timing of the triggering of Article 50 — the mechanism by which Britain officially begins withdrawal from the EU — means that a sharp exit could remain elusive. Investors should be braced for a prolonged period of uncertainty therefore, a disastrous situation for the economy.
And that’s not taking into account the possible negative implications of Britain pulling up its continental drawbridge in the long term. Indeed, many analysts are tipping the Bank of England to drive interest rates to fresh record lows in a bid to support the economy sooner rather than later, another scenario that would heap pressure on Lloyds’ bottom line.
Forecasts fall
Lloyds can’t look to foreign marketplaces to generate growth should economic growth here in Blighty hit the wall either, the result of massive streamlining following the 2008/09 financial crisis.
So City analysts now expect Lloyds to see earnings fall 14% in both 2016 and 2017. While prudent at the time, the bank’s decision to put all of its eggs in one basket and bet on the then-stable UK economy looks set to spectacularly backfire.
Many stock pickers will point to Lloyds’ ultra-low P/E ratings of 8.3 times and 9.7 times for this year and next as encouragement to invest. But the bank’s lack of clear earnings catalysts, for the near term and beyond, makes me believe that it may remain stuck in the red for some time to come.
And those buying back into the financial goliath on the back of hefty dividend yields may end up disappointed too. Predicted payments of 3.2p and 3.4p per share may fall short should chief executive António Horta Osório decide to exercise caution given Lloyds’ deteriorating income outlook, while a likely resumption of PPI-related costs could also put the brakes on dividend expansion.
As such, I reckon dividend chasers shouldn’t stake the house on yields of 5.3% for 2016 and 5.6% for 2017 being realised.
