The ‘Boris bounce’ didn’t last long for Lloyds (LSE: LLOY). Its share price peaked at 67.25p on 16 December, the Monday after the general election. By mid-January, it was back below 60p. The market evidently had second thoughts about the FTSE 100 bank’s prospects long before its results last week and the broad market sell-off this week.
The shares closed yesterday at 52p. Most brokers, analysts and media tipsters are bullish on the stock, as they have been for years. Indeed, a majority reckon it offers outstanding value. Against that, a not insignificant minority argue it’s a value trap. I’ve been in the latter camp for a good while. But I think it’s now quite a conundrum. I’m asking myself if it could finally be time to back the Black Horse.
Cheap
Purely on the common numerical indicators of value, Lloyds looks cheap. The current share price is 1.02 times the tangible net asset value (TNAV) of 50.8p a share reported in its results.
It’s at 14.9 times earnings of 3.5p a share. And with earnings forecast to zoom to 6.8p this year, the multiple comes down to just 7.6.
Meanwhile, a dividend of 3.37p gives a yield of 6.5%. And this is expected to rise to 6.7% this year on forecasts of an increase in the payout to 3.5p.
As I say, Lloyds looks cheap.
Economic cycle
Banks are highly geared to the health of the wider economy. As such, they fare badly in an economic downturn. There’s a risk the spread of the coronavirus could tip the global economy into a recession, and a risk the Brexit divorce could spark a UK recession too.
Even if neither happens, Lloyds will face a recession at some point. And with the current economic cycle looking long in the tooth by historical standards, a recession is looming ever closer on the horizon. Furthermore, with UK consumers and businesses over-indebted and under-saved like never before, this recession could be a particularly severe one.
Rising bad debts
Insolvency specialist Begbies Traynor has been tracking the health of the UK economy since 2004 in its quarterly ‘Red Flag Alert’ reports. The latest shows that at the end of 2019, almost half a million UK businesses were in “significant financial distress” — the highest level since its reports began.
Lloyds’ latest results, may be an unpleasant taste of things to come. It reported a 38% rise in bad debt impairments to £1.3bn (on a pre-impairment profit of £8.8bn). In the last recession, impairments reached £16.7bn.
Here’s what I’d buy
Lloyds undoubtedly looks cheap on the valuation metrics. I’m almost tempted, but at this stage of the economic cycle I’m still more inclined to see it as a value trap, and to avoid it. Particularly, as the recent market sell-off means many quality defensive businesses are now trading at attractive valuations.
If I was in the market for blue-chip stocks today, I’d be buying Diageo, GlaxoSmithKline and Unilever (among others). Plus one or two of my favoured recovery prospects, notably BT.
