Following the stock market crash, the FTSE 100 is packed full of bargains. That’s hardly surprising, given that the index has lost roughly a third of its value during the coronavirus crash.
This is an opportunity to buy your favourite companies at bargain prices inside a tax-free Stocks and Shares ISA, and wait for the recovery. I have favoured Lloyds Banking Group (LSE: LLOY) for some time, and now looks like a tempting entry point. Approach with caution, though. Especially these days.
The Lloyds share price has taken a battering, almost exactly halving from 63p to 31p this year, falling at a faster pace than the rest of the market.
Stock market crash hits Lloyds share price
Covid-19 will exert massive pressure on LLoyds’ personal banking customers, as well as its small and medium-sized business clients.
If people and firms go bust and default on their borrowings, the Lloyds share price will feel the burden. That’s why it is trading at just 9.3 times current earnings.
The government’s unprecedented bailout packages should limit the damage, by keeping bankruptcies to a minimum. Slashing the base rate to just 0.1% will hurt, though, by squeezing net lending margins – the difference between what Lloyds earns from lending and pays out on savings.
High yielding stock
Lloyds had pretty much given up on the savings market, judging by its rates, but still competes on mortgages, and will have to cut rates to do so.
The banking sector tends to get hit relatively hard in a sell-off, and do relatively better in the recovery. That recovery is some way off, though. At least this is a healthcare crisis, not a banking crisis. For once, the banking sector did not bring this on themselves.
Last week, broker Jefferies picked out Lloyds as the “best positioned” major UK bank in terms of its tangible book value, and said it should benefit from the Bank of England’s overhaul of lenders’ counter cyclical buffers.
The authorities aren’t going to let Lloyds go under, or any bank. The risk is that it may need to sacrifice its dividend. That’s my major concern, because Lloyds stock is worth buying for the dividend alone, with an almighty yield of 10.4%.
At that rate, you will double your money in seven years, even if the Lloyds share price stays marooned at 31p. Unless the dividend is cut, that is.
Lloyds share price is a risky buy
Lloyds was struggling to make progress before the crisis, with 2019 pre-tax profits down more than a quarter to £4.4bn, primarily due an additional £2.5bn PPI bill. Its retail banking business and commercial division saw a 38% jump in bad debts to £1.3bn, following two large corporate failures. We may see more of those.
Most of these risks are reflected in the low Lloyds share price and double-digit yield. You will need to grit your teeth, though, and hold on for the long term.
