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The Peril Of Holding Onto Lloyds Banking Group PLC

If you are a value investor, you must be familiar with most of the words used by Warren Buffett to define its asset allocation strategy — “price is what you pay; value is what you get” should ring a bell!

But what exactly are you getting for what you are paying to hold Lloyds (LSE: LLOY) stock today? 

74.76p

Well, 74.76p is the share price of Lloyds that flashes on my screen today. That’s about 15p lower than its 52-week, multi-year high that the bank’s shares recorded in mid-May. 

Its equity value has fallen 2% so far this year, which is a remarkable performance compared to that of the FTSE 100 (-7%), Royal Bank Of Scotland (-15%), HSBC (-18%) and Standard Chartered (-25%).

Only Barclays has fared better, having recorded a nice +5% since the turn of the year.

Inflation is the benchmark

Over the last two years the performance of Lloyds reads -3.5%, while its stock is up 2% in the last 12 months. Its last five-year performance stands at +1.1%. 

One conclusion that could be drawn from all these numbers is that when markets do not perform very well, Lloyds becomes a defensive investment. 

If you wonder what is going to happen to the value of Lloyds if risk appetite comes back with a vengeance — will investors sell LLOY to snap up battered HSBC and Standard Chartered? — you may be left with fixed feelings, just as I did. 

That’s the wrong question to ask yourself, anyway. 

Markets Up 

The best stint for Lloyds ever since March 2009 — when the bull market started — was recorded between early June 2012 and mid-January 2014, during which period its shares surged from 25p to 85p — that’s a 200%-plus pre-tax capital gain in about 20 months.

The FTSE 100 rose about 15% over the period, while no other UK bank managed to match that rally.

A combination of elements propelled the outstanding performance of the British bank, namely: 

  • The sale of the UK’s government stake in the bank had become a more urgent matter;
  • A more buoyant UK economy helped the rise in more cyclical sectors;
  • Prospects of dividends at some point in future attracted several investors;
  • Likely higher interest rates were predicted as the UK economy was exiting recession at the end of 2012, boosted by the Olympics;
  • Trading multiples and fundamentals clearly pointed to bargain territory;
  • A weaker British pound was perceived to be great news for the country.

Where we stand today

The sale of the UK’s government stake is slowly drawing to an end. This is priced in. 

The UK economy isn’t doing badly, but it isn’t great, either — GDP figures for Q1 and Q2 are the worst since 2013. Over the last 10 quarters, GDP in Q1 was particularly disappointing, and I doubt the market expects a significant deceleration in GDP growth in the second half of 2015. There could be bad news here, although trends are reassuring.

Higher dividends are likely, and the rise in Lloyds’ payout could be truly impressive — well, it’s a likely rise from less than 1p a share to 2p this year anyway… let’s move on. 

Higher interest rates are a possibility but are at least six to 12 months away. And there’s no Olympics to keep us busy spending during the summertime next year…

A strong pound isn’t affecting exports, yet the benefits for Lloyds shareholders are less clear than for manufacturers. Considering all this, likely additional provisions and a price-to-tangible book value at about 1.2x, I’d take my chance to beat inflation betting on some other stocks.

You want names, don't you?

This exclusive value report singles out three companies whose dividend policies, in my opinion, are more appealing than that of Lloyds, and whose stocks also offer capital gains of between 20% and 40% into 2016, in my view. 

You can download our value report -- which comes without obligations -- at this link, and you should do so right now if you want to get your FREE copy.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.