When I look at Lloyds Banking Group (LSE: LLOY), it seems to me that everything that could possibly go wrong has gone wrong. Now, I really hope I’m not tempting fate saying that. But the Lloyds share price has been battered by the financial crisis, pounded by the PPI scandal, hammered by Brexit, and now pummelled by the Covid-19 crisis. What other calamities can there be?
Oh yes, there’s the latest gloomy outlook from the Social Market Foundation. The think tank reckons the financial and construction sectors will end up the worst hit by the pandemic. But you know what? As a Lloyds shareholder (and a holder of Persimmon shares to boot), I’ve come to expect nothing but maximum pessimism from the so-called experts. But I say they’re wrong.
Lloyds share price down
While the FTSE 100 is down 17% since the beginning of the year, the Lloyds share price is now sitting on a year-to-date drop of 49%. Over five years, Lloyds shares are down 62%, pretty much bang on the Royal Bank of Scotland share price. I think institutional investors have got it wrong about RBS too, I’ll add in passing.
The lack of a dividend from Lloyds will be hurting a lot of investors, as it’s very much been an income investment. That’s especially true in recent years, with the banking crash starting to recede into history. Banking rules around liquidity have been tightened up significantly since the reckless days of old. And the Bank of England’s stress tests have been providing extra support, with Lloyds sailing through them. That’s all made dividends look more reliable, and the Lloyds share price more attractive.
Now of course, the dividend is gone. The Prudential Regulation Authority (PRA) stepped in to request banks suspend their dividends and share buyback plans. Holding back the cash was a wise move in my view, but I do get twitchy when regulatory bodies step in and take over from the free market.
What free market?
A big part of me thinks banks (and other companies) should be free to make their own decisions. I don’t see any sense at all, for example, for an international bank like HSBC Holdings to have to follow the orders of the UK’s PRA in setting global policy. It means we can’t see which banks are managing things best. We don’t know how they’d treat dividends given the freedom, and I feel that will have damaged the Lloyds share price too.
If we can’t use Lloyds’ management of its balance sheet during the crisis as any kind of measure, that surely adds to market uncertainty and aggravates bearish sentiment. And uncertainty has been one of the biggest killers of the Lloyds share price in recent years.
So what’s the bottom line for me? At around the 30p share price level, I think Lloyds is priced to go bust. And I just don’t see that happening. I reckon buying now will lock in future dividends at significantly better yields than if we wait for the end of the crisis.
