On 25 October 2023, Lloyds Banking Group (LSE: LLOY) released a solid-looking third-quarter management statement but the share price didn’t move much.
However, there’s been plenty of action in the stock over most time periods. The trouble is, much of it has been in the wrong direction.
A long downtrend
Lloyds is only about 2% lower than a year ago. But there’s been volatility because the stock rose by about 25% during that period before dropping back again.
The picture gets worse if the timescales are extended. Over five years, the stock is around 30% lower. And it’s down by about 45% from 10 years ago.
One of the main attractions for many investors is the often-high dividend yield.
But a strong income stream is worth little if the capital in a portfolio is being eroded by a sinking share price. And there’s no doubt that Lloyds has been trending lower over long timescales.
Lloyds is a serial disappointer. But the trouble is, the fundamentals can look so tempting.
For example, we often see periods of strong forecasts for growth in earnings. And at the same time, the valuation usually appears to be on the floor. The price-to-tangible-book value is running at about 0.72 now, according to my data provider.
Recovery always seems to be just around the corner. And to be fair, there have been short periods when the stock has risen strongly within that longer-term downtrend.
But that’s just the cyclical nature of the beast at work. And for me, those little bounce-backs aren’t a good reason for entertaining a long-term position in the stock.
Good recent trading
However, in the third-quarter statement to 30 September the company said it continues to perform well. The directors pointed to “robust” financial performance and “strong” capital generation in the first nine months of the year.
Chief executive Charlie Nunn thinks the progress helps the firm’s ambition to enable higher, more sustainable returns.
Net income rose by 7% in the period. And earnings for the year look set to stage a triple-digit percentage bounce-back after plummeting in 2022. Such volatility in the trading and financial figures is a fact of life with Lloyds.
Meanwhile, City analysts are optimistic about those all-important shareholder dividends. And they’ve pencilled in double-digit percentage advances for 2023 and 2024.
Cyclically challenged
Is the valuation about to finally re-rate higher? Maybe. And that’s what many long-suffering shareholders will likely be hoping. Rewards can be substantial from cyclical bank shares if an investor manages to catch an upswing in the cycle.
But that’s a shorter-term strategy. And my guess is Lloyds is unlikely to reverse direction and start a long-term uptrend. However, I could always be wrong about that.
Nevertheless, those cyclical risks are real and can bite at any time if the general economy tanks.
Earnings, cash flow and dividends can shrink fast. And if that happens, the share price will likely plunge too. Lloyds doesn’t deserve a higher valuation, and that’s a big part of the problem here. The market keeps shrinking the rating even as profits rise.
For me, Lloyds belongs on the ‘too difficult’ pile. So I’m watching from the sidelines.
