3 reasons to sell Lloyds shares today

The Lloyds share price is falling again, as economic conditions worsen. I’ve been examining my investment case and wondering whether to sell.

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I own Lloyds Banking Group (LSE: LLOY) shares. And every time I examine the company, I convince myself there are good reasons to hold — and maybe even to buy more. But it’s good for me to sense check this and to take a look from the opposite perspective.

So what have critics of the stock been saying? Here are three of the most common reasons I can find for selling Lloyds shares right now.

Economics

The big one is economics. The Consumer Price Index soared by 9% in the 12 months to April, up from 7% in March. And forecasts suggests that’s not the end of it yet.

Energy costs have climbed, with food prices also escalating. Households, and businesses, face financial crises. And that brings the spectre of rising bad debt, not long after it had eased following the pandemic.

In the first quarter, Lloyds took an impairment charge of £200m. That’s modest, but the likelihood of bigger impairments in coming quarters is surely growing.

I doubt bad debt impairments will reach the levels of the pandemic. And that turned out better than hoped. But I do expect further hits.

Housing

As the UK’s biggest mortgage lender, Lloyds would surely be hit by any housing slowdown.

It comes when rising interest rates have been starting to help the banks too. Those near-zero rates for so long were making it very hard to squeeze much margin out of the lending business.

Mortgage demand was still growing in the first quarter. But I really think that could reverse as families increasingly feel the squeeze.

Looking at long-term demand, I remain bullish over housebuilding, and therefore mortgages. I don’t fear a property meltdown. But even a year of weakness could scare away Lloyds investors.

Dividend

My overall fear is that the Lloyds dividend could come under pressure. For 2021, the bank paid 2p per share, “in line with the group’s progressive and sustainable ordinary dividend policy“.

On today’s depressed Lloyds share price, the same again would yield 4.6% in 2022. And I would still find that attractive.

The 2021 payment was covered 3.75 times by earnings, so there’s plenty of room to spare there. Liquidity was also strong enough for a £2bn share buyback, which is ongoing. That suggests to me that the threat to the dividend might not be as bad as feared.

But even if Lloyds doesn’t cut its dividend this year, I see a strong possibility of that progressive policy suffering a setback.

Time to sell?

So, after all that, will I sell my Lloyds shares? No, even though I do see these risks as very real. Whenever a stock I own faces external threat, I approach it one way. I look at the current valuation, and decide how I think that stacks up agianst the risk.

On trailing earnings, the Lloyds share price is on a P/E of under six. That’s less than half the FTSE 100‘s long-term level. To me, the dangers for the coming year are already factored in to today’s low share price, with some margin to spare.

On valuation grounds, Lloyds remains a hold for my portfolio.

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.

Alan Oscroft has positions in Lloyds Banking Group. 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.

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