With a full £20,000 ISA allowance to invest, would I have the nerve to put it all into Lloyds Banking Group (LSE: LLOY) shares?
If I plonk that amount of cash down on Lloyds, the dividend yield of 5.2% should net me £1,040 in income a year.
Well, that’s just the forecast. But analysts think bank earnings should be among the biggest FTSE 100 risers this year. And they see the Lloyds dividend growing.
Turn to Buffett
I need to ask myself, what would Warren Buffett do?
The ace investor, who’s steered Berkshire Hathaway shareholders to riches, buys big when he thinks a stock is cheap. And that lies behind one of his most famous quotes:
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Letter to shareholders, 1986
And, boy, are investors fearful of banks in 2023.
The big sell-off has put Lloyds shares on a forecast price-to-earnings (P/E) ratio of only around six. Oh, and that’s a bank the market is relatively bullish about. Barclays is down on a P/E of under five.
Contrarian courage?
To be a contrarian investor, we need to have the courage to buy what we think is cheap no matter what anyone else thinks. Oh, and to suck it up without complaining when we get it wrong.
So the first thing to do then, is look at the risks. The main one has to be the housing market. Lloyds is the UK’s biggest mortgage lender, at a time when property prices are falling.
Various pundits are predicting house price falls of between 5% and 10% over the next year or two. And those are the cheerful ones.
Defaults and bad debts
With inflation so high, more and more people are missing payments. Then when fixed-interest deals expire, it seems unlikely that new ones will be at the same old rate.
So we could end up with lots of defaults. And lenders might be hit with high impairments for bad debts.
In 2022, Lloyds took an impairment of £1.5bn. Still, in the first quarter of 2023, we saw just a modest rise of £0.2bn.
So in all this gloom, is there a bright side to Lloyds? I think there is.
The bright side
First, there’s a plus from high interest. It boosts lending margins and that helps Lloyds quite nicely.
So we have a balance here, between higher margins from lending, and fewer borrowers with more defaults. Fortunately, Lloyds liquidity is strong, and I think it can cope.
I also think the main positive right now comes from bank share valuations. Everyone knows the risks, and the big investing firms have priced them in.
Undervalued
But, as always seems to happen, I reckon they’ve gone too far again. Even with the known risks, I’d still say the shares are oversold and undervalued.
So back to my question. Would I put a whole £20,000 in Lloyds shares this year? I’ll be moving some investments around in 2023, and I might have that much to go into an ISA. I’m seriously considering it.
