Here’s why I’m not giving up on Lloyds Banking Group plc

I’ll admit my investment in Lloyds Banking Group (LSE: LLOY) hasn’t been my most sparkling success to date. With the shares at just 56.5p, I’m more than 25% down since buying a year ago, though there’s a bit of comfort in the form of dividends worth 4.4% of my original investment.

Looking back further, since the end of 2013 we’ve seen a 29% price fall — and that was while profits were coming back, and dividends were reinstated and rose to yield 3.1% in 2015. So why am I happy to keep on holding such a loser?

Fundamentals look so cheap

For one thing, we’re looking at a forward P/E of only 7.8, even with a 14% fall in EPS forecast for the year to December 2016. And if the earnings fall is repeated in 2017 as predicted, that multiple would rise only as far as nine, which still seems scarily cheap to me. The FTSE 100 is on a long-term P/E valuation of around 14, and that’s with a lower average dividend yield — Lloyds’ dividends are expected to yield 5.7% this year and 6.1% next, and even with falling earnings they should be adequately covered.

With the run of post-crisis earnings growth having stalled, it could be argued that this is as profitable as Lloyds is going to get and we’re looking at ‘business as usual’ for the next few years. And actually, I’d say the short-term sentiment looks worse than that — we really are seeing a post-Brexit slump priced-into Lloyds shares now.

The fears aren’t irrational. Lloyds would be hit hard if the UK loses its EU ‘passporting’ rights that underpin the international attraction of London’s financial centre. And even if a good deal is struck as part of our leave negotiations, the longer the uncertainty remains, the greater the chance of overseas financial business finding its way to Frankfurt or Paris instead of London.

The PPI scandal is another blight for Lloyds investors, as the FCA has decided to extend the claims deadline once again — shareholders had been hoping to see the bleeding wound cauterised some time in 2018.

Maximum pessimism

So with all of this gloom and despondency around, why am I still hanging on to my Lloyds shares? There are two main reasons.

The first is that when all the bad omens are gathering, the horizon looks darkest, and pessimism is reaching a maximum — that’s the time to buy, not sell!

Just as it’s no good buying shares when everyone else is piling-in and overvaluing them, it’s not time to sell when everyone else is dumping and pushing them down. After all, institutional investors are super cautious in the face of uncertainty, and I think the fears have been overdone once more — as they have been every single time we’ve had a downturn over the whole of my investing career. 

Secondly, it’s that long term thing — I don’t intend to sell my Lloyds shares for at least another decade, so what happens in the next couple of years of uncertainty is largely immaterial, and I’m not going to buy and sell every time emotions change.

On top of that, Lloyds shares also look undervalued compared to their peers — Barclays is on a 2016 P/E of 13.5, with Royal Bank of Scotland on 18. Lloyds looks to have some safety margin even against the banking sector in general.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.