Over the past 12 months, shares in Lloyds Banking Group (LSE: LLOY) have plunged, falling a total of 25% since the end of December last year. Over the same period, the FTSE 100 has declined by 12%, implying an underperformance of around 13%, excluding dividends.
If we include distributions to investors, Lloyds’ performance is only slightly better. Over the past 12 months, the stock has produced a total return of -19% compared to a loss of 8% for the UK’s leading blue-chip index.
Instead of following the rest of the herd and selling Lloyds, I think now could be the time for investors to follow the Oracle of Omaha, Warren Buffett’s famous advice and be greedy while others are fearful.
The cause of the problem
Before I get into why I think now is the time to buy Lloyds, I believe it’s essential to consider the reasons behind the recent declines. It’s not an entirely satisfactory answer, but I reckon Brexit uncertainty is the primary reason why investors have been running for the hills.
Lloyds is undoubtedly one of the most exposed companies in the FTSE 100 to Brexit — 97% of its businesses UK-focused. As the UK’s largest mortgage lender and one of the country’s largest banks, falling property prices, or a rise in consumer defaults, could cause massive losses on the bank’s balance sheet, which would ultimately translate into lower profits and shareholder returns.
Lloyds has virtually no control over the Brexit process and cannot influence how the UK economy will react when the country leaves the European Union at the end of March. But management can prepare for every eventuality, and they’ve been doing just that.
As well as planning to open three new offices across the EU, the lender is working with the Bank of England and its peers to make sure the industry as a whole is well-prepared for any eventuality.
At the same time, management has reassured investors that no matter what happens between the UK and EU, the bank will continue to “support our customers whatever the outcome.“
Worst case scenario
It seems to me that the worst-case scenario is already factored into the Lloyds share price. At the time of writing, shares in the bank trade at a forward P/E of just 6.6, compared to the market average of 11.1, implying investors believe the bank’s earnings per share will slump by 50% over the next two years. While this is a possibility, I think it’s unlikely unless we have a major recession.
The question is, what happens if the UK manages to sign a deal with the EU? In this case, shares in the bank could jump in value, and I believe this scenario is more likely than a ‘no deal’ outcome.
Considering the above, I think now is the time to buy shares in Lloyds. The market is assuming the worst and giving no credit to a possible positive outcome. At the same time, the stock supports a dividend yield of 6.3%.
