Lloyds Banking (LSE: LLOY) shares are cheap. Shout it from the rooftops!
Actually, that’s what many have been doing judging by the many thousands of words written about the business and the stock over the years.
And it’s not just writers who like to focus on Lloyds. Investors do too. My Motley Fool colleague Zaven Boyrazian recently pointed out that Lloyds shares are the most traded on the London Stock Exchange.
The frustration of holding Lloyds
But the word ‘traded’ could be a clue to how investors are making money on the stock. If, indeed, any investors are consistently making money by holding Lloyds shares.
It’s probably old news to point out that the share price has been volatile. And investors focused on holding stocks for the long term must be worn down with frustration by now.
However, there’s a warning sign with Lloyds that might have flown under the radar for many. And it relates to its fat dividend that’s often one of the big justifiers for taking a position in the shares.
The backstory is that the UK’s biggest banks such as Barclays, NatWest, HSBC, Lloyds, Santander and Standard Chartered all suspended dividend payments and share buybacks in 2019 and through 2020. That was because of the pandemic. But the Prudential Regulation Authority (PRA) had been pressurising them to do that.
However, it’s what has happened since that I see as a warning sign for long-term investors tempted to hold the Lloyds stock.
The warning is that the company still hasn’t restored its dividend to pre-pandemic levels. And even after City analysts’ forecasts of double-digit percentage rises for 2023 and 2024, it will only be around 3.13p per share in 2024. However, in 2019, it was 3.26p.
What’s the problem?
If Lloyds business is doing so great, why have the directors seized on the opportunity of the pandemic to rebase the dividend lower?
And I’d bet that people could suggest lots of reasons why the business might be fragile. One of the most recent worries is that higher interest rates and a plunging housing market could cause a big rise in losses because of people and businesses defaulting on their loans.
But that’s just the worry of the day. I’ve noticed that there always seems to be at least one cylinder causing the Lloyds business to backfire.
However, my way of looking at things is that most of the bank’s problems can be summarised in 12 words: the business is extremely sensitive to the cyclical effects of the economy.
And that’s probably why the directors have been cautious with shareholder dividends. It’s possible that the business may soar away into a prolonged period of prosperity now that the interest rate environment has improved for banking companies. However, we never know when the next setback may also be just around the corner.
So, to me, the bank deserves its low-looking valuation. And it will always likely be a difficult long-term hold for investors.
Nevertheless, looking at that chart, there have been some cracking shorter-term trading opportunities over recent years with Lloyds.
However, I’d rather seek my longer-term investments from stocks and businesses in other sectors that are less ravaged by the effects of cyclicality.
