The steady updraft in Lloyds Banking Group’s (LSE: LLOY) share price is showing no signs of slowdown.
The financial giant has seen its value advance almost 20% during the past six months alone, and is now dealing at its most expensive since the aftermath of June’s EU referendum.
However, I believe this is a good time for investors to cash in, as the risks facing the bank remain significant. Investors remain optimistic about Lloyds’ prospects, as economic data continues to outperform prior expectations. The OECD, for one, hiked its 2017 UK growth forecast to 1.6% from 1.2% just this month.
But the prospect of a sharp cool-down remains a very real possibility, as the UK adjusts for the Brexit process to begin in the months ahead. Indeed, the OECD expects growth to slow to just 1% in 2018, as EU withdrawal negotiations gather steam.
The City currently expects Lloyds’ earnings to rise 140% in 2017, resulting in a P/E ratio of 9.7 times. And this low multiple suggests that any risks facing the business are baked-in at current prices. I am not convinced, however, and reckon these forecasts could be subject to severe downgrades as 2017 progresses.
Meanwhile, those hopeful of further abundant dividend growth could also end up disappointed, as the size of PPI-related penalties appear to be picking up again. Earlier this month Lloyds made an additional £350m provision to cover the costs of previous misconduct, taking the total to date to £17.35bn.
So while the number crunchers expect the dividend to rise to 3.7p per share in 2017 from 2.55p last year, in my opinion investors should treat a subsequent 5.4% yield with some suspicion.
Telecoms troubles
Like Lloyds, investor appetite over at TalkTalk Telecom Group (LSE: TALK) also continues to simmer and the multi-services entertainment provider recently edged to its most expensive in four months.
TalkTalk saw revenues dive 5% during October–December, to £435m, due to the introduction of low-price packages in October on top of re-contracting effects.
The company is hoping that this could prove a temporary problem, but the business may struggle to get sales chugging resolutely higher again as traditional players like BT, Sky and Virgin Media — and more recently the likes of Vodafone — battle for its business.
The City has no such concerns, and expects earnings at the business to rise 55% in the year to March 2017, and by an additional 8% the following year.
These readings result in P/E ratios of 13.7 times and 12.6 times respectively — attractive on paper but not low enough given that TalkTalk’s markets are becoming ever tougher.
And TalkTalk’s swelling debt levels are also anticipated to hurt dividends in this period and beyond — last year’s reward of 15.87p per share is estimated to drop to 14.6p this year and again to 12.6p in fiscal 2018.
While these projections yield a market-busting 8% and 7.1% for this year and next, I reckon TalkTalk’s long-term outlook remains on shaky footing and that the stock is thus too risky at present.
