I recently decided to dump my shares in Premier Oil. The reason is one of the oldest but one I still find hard to act upon.
I decided my original purchase was a mistake, and the only thing to do is sell — the signs I’d got it wrong were there in abundance but, even after all these years, I find it hard to break my attachment to a stock I own.
I mused about buying Gulf Keystone shares, but in the end I changed my mind. Gulf is still on my buy list, but this time I used the cash to top up my holding in Lloyds Banking Group (LSE: LLOY). I want to tell you why.
Bearish view
But first, there are some good reasons to avoid Lloyds shares which, as my Motley Fool colleague Kevin Godbold has pointed out, have put in a pretty dreadful five-year performance. Putting my money in a FTSE 100 tracker over that period would have got me a better return, with lower risk.
It’s perhaps too early to call it, but sentiment towards Lloyds might finally be turning. Since August’s low point, the share price is up 18%, with the Conservative election victory giving it a bit of a boost.
The price is down 5% today as I write though, after the Prime Minister announced his intention to make it illegal for Brexit to go beyond 2020 — I really don’t know why he thinks he has to do that, seeing as he has no effective opposition in parliament now.
Brexit
The prospect of a no-deal Brexit has been weighing heavily on Lloyds and our other banks, and the PM’s latest move has sowed a little more doubt on that now. A no-deal departure has definitely been, as far as I can see, the biggest threat to the banking sector — but I’ve always had a ‘they can’t be that stupid, can they?’ thought stuck in my mind.
The price leap on 11 Oct also pointed the finger firmly in the direction of Brexit, inspired by the good progress Boris Johnson was apparently making in securing a new agreement — the agreement he now has free rein to push forward with.
Kevin is right about the cyclical nature of banking in his assessment, but I keep trying to look at Lloyds in an imagined post-Brexit, trade-deal environment — the one I hope and think we’re going to get.
Stress test
Looking at it like that, I’m still seeing a profitable bank, paying well-covered dividends forecast to yield more than 5% this year. Lloyds liquidity situation still looks healthy too, with the bank having comfortably passed the Bank of England’s 2019 stress tests — which it described as “the most severe test that the group has faced and more severe than the last global financial crisis.”
All in all, I see P/E valuations of around nine, while perhaps understandable because of the uncertainty we’re still in, as too low. It does, it seems, still all depend on the success or otherwise of the final chapter of the Brexit saga. But low price levels make the dividends still look very attractive to me with my investing horizon of 10 years plus.
