At this share price, I’d buy & hold Lloyds for the long haul

Lloyds Banking Group plc (LON: LLOY) has a robust model that can ensure a steady dividend.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 stock Lloyds Banking Group (LSE: LLOY) has been a favourite with income investors for a long time, and it’s easy to see why. The UK’s largest retail bank currently boasts a dividend yield of over 5% and follows a centuries-old model: loan money out at a higher interest rate than you pay on your deposits. Although this conservative strategy limits the possibility of a sharp appreciation in share price, it does provide investors with some assurance that their dividend payouts will continue.

Decent results and a resilient model

Although its most recent earnings report was viewed as a bit of a disappointment, the bigger picture still looks good for Lloyds. Even though the banking sector as a whole has been depressed, Lloyds has proved to be more resilient than most. The bank’s net interest margin (the difference between interest charged to lenders and interest paid out to depositors) has remained stable at 2.9%, falling just 0.01% compared to the previous period.

Furthermore, the Prudential Regulation Authority recently decided that Lloyds was safe enough to allow it to decrease its risk buffer, unlocking a potential £1 billion, which can now be distributed to shareholders in the form of share buybacks or dividend increases.

Not everything is smooth sailing

However, it would be remiss to not cover some of the risks facing the bank at this point. The fallout from Payment Protection Insurance mis-selling continues to weigh on large retail banks like Lloyds. Earlier this month, the bank announced that it was setting aside a further £100 million to cover compensation costs. I do think that this is a problem that will eventually go away, but it does continue to be a thorn in their side.

A bigger issue for Lloyds would be a slowdown in the housing market, given how reliant it is on mortgage lending. The latest data shows that the number of first-time buyers is down 2.4% over the last 12 months, and if that situation gets worse, retail banks like Lloyds would be adversely affected. 

Potential Brexit upside

It seems odd to talk about Brexit as something that may be good for stocks, but in this case I think it’s warranted. At this point, the uncertainty surrounding the process is a bigger drag on UK financials than an orderly Brexit (which has largely been priced in) would be, and at this point I think that Lloyds would respond positively to most resolutions to the impasse.

Of course, there still remains the possibility of a no-deal scenario, which could have damaging long-term effects on the entirety of the financial sector. However, I still think that Lloyds is comparatively better positioned than some of the challenger banks that have been nipping at its heels over the last few years. If anything, a no-deal scenario could exert enough pressure on the banking industry to make it consolidate, and in that case you should expect to see bigger lenders like Lloyds doing better.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stepan has no position in any company mentioned in this article. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

If an investor put £10k into Greggs shares one month ago, here’s what they’d have today

Greggs shares have had a tough year but Harvey Jones says they're notably cheaper as a result, while the dividend…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

The Phoenix share price jumps 7.5% on today’s results, but still yields a stunning 9.4%!

Harvey Jones put his faith in the Phoenix share price and this morning was rewarded with a 7.5% jump on…

Read more »

Investing Articles

What’s been going on with the Barclays share price?

The rising Barclays share price reflects confidence in management’s strategy to improve business performance and enhance shareholder returns.

Read more »

Investing Articles

Prediction: in 1 year, the IAG share price could reach as high as…

The IAG share price has almost doubled in the last 12 months, but can this momentum continue in 2025? Zaven…

Read more »

Investing Articles

Prediction: in 12 months, here’s where the Glencore share price could be…

The performance of Glencore’s share price has been lacklustre, to say the least. But could all that change over the…

Read more »

Investing Articles

See how much an investor needs in their ISA to earn a £499 monthly second income

Harvey Jones crunches the numbers to show how it's possible to build a long-term second income by investing in a…

Read more »

Investing Articles

I’m considering buying more of this struggling FTSE 100 stock

This FTSE 100 stock hasn't exactly set our writer's portfolio on fire during the time he's owned it. But Paul…

Read more »

a couple embrace in front of their new home
Investing Articles

Prediction: in 1 year, the Taylor Wimpey share price could reach…

Can Britain’s reformed planning scheme send the Taylor Wimpey share price into overdrive? Here’s what the latest analyst forecasts predict.

Read more »