Here’s why the Lloyds share price faltered in November

The threat of unspecified car loan liabilities kept the Lloyds share price in check during November. But is the market overreacting to a short-term issue? 

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

View of Tower Bridge in Autumn

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Lloyds Banking Group (LSE:LLOY) share price finished November pretty much where it started the month. That doesn’t sound like news, but it’s more interesting than it seems.

Created with Highcharts 11.4.3Lloyds Banking Group Plc + Barclays Plc + NatWest Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL1 Dec 20191 Dec 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24www.fool.co.uk

In a month where Barclays and NatWest both saw their shares climb over 5%, Lloyds going nowhere is underwhelming. So what should investors think of the stock?

What happened in November?

The market’s still computing the news that Lloyds might be in trouble for practices around car loans. That risk has been known for a long time, but it became more real at the end of October.

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

There’s still a lot to be decided, including how much customers will be entitled to, what periods will be covered, and how many will actually claim it. That makes things quite uncertain.

It’s hard to be confident valuing a stock when it might have a future liability of an unspecified magnitude. And that’s the main reason the Lloyds share price has underperformed its rivals.

Barclays and NatWest are less exposed to car loans. But the big question right now is whether the Lloyds share price faltering is an opportunity or a trap? I think it might be both.

Assessing the damage

Estimates of what Lloyds might be liable for as a result of the car loan investigation vary. The highest I’ve seen so far is £3.9bn. 

That’s just under 1% of its total loan book, which is where the majority of the bank’s profits come from. But the stock’s fallen over 14% on the news. 

Put another way, a potential £3.9bn fine has caused the firm’s market-cap to fall by around £5.5bn. And that’s leaving aside the fact other bank stocks have moved higher in this time.

There’s also reputational damage to consider. And while that’s even harder to quantify, I think the stock might well be worth a closer look. 

Short-term vs long-term

As I see it, the question of whether investors should see this as a big problem comes down to how long they want to own the stock for. The longer that is, the less I think they need to worry.

£3.9bn is roughly a third of the bank’s annual net interest income. In the context of a five-year investment, that’s roughly 6% of the expected profit, which is fairly significant. 

Over 30 years though, £3.9bn looks more like 1% of the total profit. And that’s within the margin of safety I think investors should want to consider buying the stock in the first place.

It’s not just the £3.9bn that matters – it’s the return on this that Lloyds would have generated in the future. But even so, a longer time means the overall significance of the fine diminishes.

Opportunity?

Car loan liabilities aren’t the only reason the Lloyds share price faltered in November. The bank listed £185m in new shares to use as part of employee incentive schemes.

I don’t see that as a major issue though. It limits the effect of the company’s share buyback programme, but not by a significant amount. 

Overall, I think the stock’s worth considering from a long-term perspective. The outlook for the near future might be weak, but the faltering share price factors in quite a lot of this.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With value investing back in vogue, I’m taking a leaf out of Warren Buffett’s playbook

With tariffs and trade wars resulting in heightened market volatility, Andrew Mackie takes comfort in Warren Buffett’s words of wisdom.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »