The stock of Lloyds Banking Group (LSE: LLOY) is one of the most widely traded in London. Indeed, it always features among the top-five weekly trades for retail investors.
However, owning Lloyds shares over the past few years has been a frustrating experience. Quite simply, this FTSE 100 stock never gains any upward traction before dropping back to earth.
Lloyds shares are a let-down
As I write on Wednesday afternoon, the Black Horse bank’s shares stand at 43.9p, valuing the group at £28.6bn. Though this is a big number, it seems a modest price tag for the UK’s #1 mortgage lender, as a well as a leading provider of credit to individuals and companies.
What’s more, Lloyds employs around 58,000 staff and has 26m UK customers. And its leading financial brands include Lloyds Bank, Halifax, Bank of Scotland, and Birmingham Midshires.
Despite the group’s sheer size and strength, Lloyds shares have gone nowhere. Here’s how they’ve performed over seven different periods:
| One day | -2.0% |
| Five days | -3.0% |
| One month | -6.5% |
| Year to date | -3.4% |
| Six months | -5.1% |
| One year | +1.0% |
| Five years | -29.3% |
This table clearly supports my argument that Lloyds stock has no momentum over the short or medium term. Apart from a 1% rise over one year, the stock is slightly down over all periods ranging from one day to six months. Even worse, its lost almost three-tenths of its value over five years. Yuk.
No wonder some cynical investors regard Lloyds shares as the ultimate ‘value trap’. However, the above figures exclude cash dividends, which have delivered a big chunk of the stock’s long-term returns.
Is Lloyds doomed to be cheap forever?
When I look at this banking stock today, I see a very undervalued share. At the current price, the shares trade on a price-to-earnings ratio of 6.1, which translates into an earnings yield of 16.4%.
That’s cheaper than the wider FTSE 100, but you could have said much the same thing at practically any point during the past decade. What might be the catalyst to send the share price back above 50p and motoring towards £1?
For me, the turning point could be repeated hikes to the bank’s already generous cash payouts. Right now, Lloyds stock offers a chunky dividend yield of 5.5% a year, covered three times by earnings. This huge margin of safety leaves loads of leeway for the board to keep lifting these cash returns.
Also, I would hope that the board of directors can see the value of buying even more of the bank’s stock while it trades at a deep discount to book value. After all, doing so would reduce the share base and raise future earnings/dividends per share.
Do I sell up and move on?
Straight away, I will confirm that I have no plans to sell our Lloyds stake for now. My wife bought it for our family portfolio as a value/income/dividend play — and nothing has changed to make us rethink this. Sure, 2023 will be tougher than 2022 for the bank, due to rising bad debts and loan losses. But I must keep reminding myself that this is a long-term holding and not a short-term trade!
