Having been a shareholder in Lloyds Banking Group (LSE: LLOY) for over 19 months, I’ve come to appreciate other investors’ frustrations with this stock. Frankly, Lloyds shares have been a long-term lemon, destroying shareholder value for many years.
For the record, my wife and I bought a stake in the Black Horse bank in June 2022, paying 43.5p a share.
Lloyds lags the market
As I write (on Monday, 5 February), the share price stands at 42.04p, valuing the group at £26.9bn. Thus, we are sitting on a paper loss of 3.3% to date.
However, this figure excludes dividends, which was the primary reason we bought into this business. Adding in these cash payouts boosts our total return to 3.6%. Also, we reinvested our Lloyds dividends into buying yet more shares, potentially raising our future gains.
Then again, such a modest return for more than 1.5 years of ownership was hardly worth the risk of buying Lloyds stock. Indeed, we’d have made more money in a savings account over this period.
Furthermore, this Footsie share is down 20.4% in 12 months and 26.1% over five years. To me, this stock shows no immediate signs of ending its run as a long-term disappointment for investors.
What if Lloyds turns the corner?
Then again, Lloyds stock doesn’t look particularly expensive to me. Indeed, with the weakening share price lifting the dividend yield ever higher, I might even be tempted to buy more stock.
At current price levels, the shares trade on a modest multiple of 7.5 times earnings, delivering an earnings yield of 13.3% a year. This is considerably less expensive than the wider FTSE 100.
Furthermore, the bank’s stock offers a trailing dividend yield of 6% a year. That’s 1.5 times the FTSE 100’s yearly cash yield of 4%. As a bonus, this payout is covered a healthy 2.2 times by historic earnings, leaving room for further uplift.
To me, this indicates that my original buying strategy is intact, as Lloyds looks set to be a dividend powerhouse — for at least the next couple of years, I hope. In addition, the group has billions of pounds of spare cash on its balance sheet, some of which it uses to buy back its own shares.
Big risks remain
That said, British banks might face strong headwinds in 2024. Sluggish economic growth could trigger a full-blown recession, putting further strain on household and corporate budgets.
Furthermore, times are tough in commercial real estate, with property values hit by higher interest rates. Plus Lloyds might have to pay out large sums in compensation to borrowers who were mis-sold finance by car dealers funded by the bank.
In short, it’s highly likely that the group’s provisions for bad debts and loan losses will rise substantially this year. Similarly, weaker credit growth and falling interest rates could hit revenues and earnings.
Despite these rising risks, I shall hang onto our Lloyds stock. And while I wait for the share price to recover, I’ll take the generous 6% a year for my support!
