After the glorious relief rally that began in mid-February, markets are feeling edgy again. The old fears keep recurring: China. Debt. Demographics. The euro. US rate hikes. Brexit. Suddenly, every website has click bait ads shouting crazy things like “Why this year’s crash will KILL the stock market“. These ads pop up every time we have a wobble. We may live in troubled times, but times like these also throw up opportunities for investors.
Lloyds Lives!
Lloyds Banking Group (LSE: LLOY) is one of them. If you’re really running scared and believe the stock market WILL DIE at some point this year, you might prefer to withdraw all your money from the stock market and put it into cash instead. But if you continue to believe – like me – that stock markets are the best way to build your long-term wealth, then stocks like Lloyds simply can’t be ignored.
Lloyds isn’t rock solid, of course. You can’t say that of any bank these days. Prior to the banking crisis, its share price hit a high of 622p. Today, it trades at just 65p, barely one tenth of its former value. Lloyds is still trying to rid itself of so much toxic sludge, although it’s getting there, as the PPI poison is slowly extracted. The postponement of Chancellor George Osborne’s spring flotation plans shows that its troubles are far from over, as does recent share price performance. It’s still 22% lower than it was a year ago.
Lloyds may be narrowing its focus to the UK retail and SME market but it remains vulnerable to events elsewhere in the world, as we saw earlier this year when its share price was punished due to problems at Deutsche and other European banks. These problems could rear up at any moment. For example in Italy bad loans now total €360bn, equivalent to 20% of the country’s GDP, and banking stocks have lost one third of their value this year. Lloyds isn’t affected, but negative sentiment moves swiftly across borders these days.
Hold on tight
So yes, there are risks, but these are ultimately outweighed by the potential rewards. Many of the dangers I’ve listed are reflected in the price, with the stock trading at just 7.65 times earnings. While earnings per share are expected to drop 11% this year there are signs of improvement, with a forecast 2% growth next year. Lloyds now trades at the same level as its net asset value, with a price-to-book (P/B) ratio of exactly 1.
Last but certainly not least, there’s the income. Lloyds now yields 3.57%, which is forecast to hit a whopping 7.9% by December 2017. Better still, its strong capital ratios, with Tier 1 capital of 13% and a total capital ratio of 21.4%, means it can switch its focus away from building up its capital cushion towards dishing out goodies to shareholders. The share price may remain volatile, but this is primarily an income stock rather than a growth stock. The share price could fall further in the short term, even from today’s low levels, but the income will be yours to keep.
Lloyds is a long-term investment, one that allows you to tune out the short-term noise. That makes it a soothing choice in today’s noisy investment climate.
