How Lloyds Banking Group plc could damage your financial retirement

Does Lloyds Banking Group (LSE: LLOY) stack up as a firm with a business steady enough support a long-term investment capable of growing to help fund a comfortable retirement? I don’t think so.

Following the cash

I reckon the first purpose of any business is to generate escalating inflows of cash that support profits. To do that many trading firms occupy a profitable trading niche in the market and tend to enjoy repeat business from loyal and satisfied customers. Unilever (LSE: ULVR) does this well with its fast-moving consumer goods business, for example, as you can see from the firm’s financial record.

Cash inflow from operations and profits are both generally expanding, and the cash figure each year supports the profit figure. That all looks good to me, but it’s a different story with Lloyds.

Both cash inflow from operations and profits have been erratic. Some years the cash has fallen short of profits.

Is Lloyds a recovery play?

City analysts following Lloyds project increases in profits for 2017 and 2018, and it is well known that the firm is emerging from a period of operational problems and challenges. So, is the company a decent recovery play set to grow consistently year after year from here? If so, is there a good chance that the low-looking valuation will re-rate upwards to accommodate Lloyds’ growth prospects?

I’m pessimistic about that. As I see things, the problem is that Lloyds’ banking business is dependent on the success of the wider economy and how that affects the individuals and businesses which Lloyds serves. The firm’s commodity-style operation is cyclical and the recent problems should be seen in that context. Yes, Lloyds is recovering, but for how long? The firm has no protection to stop it from going down again next time the economy stalls.

Contrast that situation with Unilever’s business supplying goods that many see as ‘essential’, even in hard times. And add to that the attraction of repeat sales and protection from strong brands that consumers covet, and we can start to see why Unilever’s cash flow and profit figures end up looking so much more attractive.

Unilever’s business has a lot going for it that Lloyds is missing, such as steady cash flow that supports profits, top and bottom line growth rising together, operations established in a niche market, economic moats and pricing power. The differences show up in each firm’s record of dividend payments.

Lloyds’ dividend seems to be rising fast but my fear is that it could fall again just as quickly and even go back to zero if Britain’s economy turns down. Unilever’s steady performance with the dividend looks set to continue and the payout seems less likely to be threatened because of macroeconomic fluctuations.

I have more faith that a trading company such as Unilever, or many others, will deliver a good long-term return for investors. Lloyds’ undifferentiated commodity operation seems more vulnerable to economic shocks that could damage your financial retirement if you hold the shares for the long term.