A few months ago, I found myself pondering the following meaty question: is Lloyds Banking Group (LSE: LLOY) my worst stock pick EVER?
Top stock pick
The reason I was agonising so much was that in December last year I boldly proclaimed that Lloyds was “my top stock pick for 2016,” with predictably dismal consequences. Within two months the share price had plunged from 72p to 56p, a drop of 20%.
Here we are at the end of August and Lloyds still isn’t flying, trading at just 59p. None of us can see the future and I certainly didn’t anticipate Brexit, with the chance of the UK actually voting to leave the EU a slim possibility at the time. That momentous decision shattered all the major banking stocks and sent UK-focused Lloyds crashing to a 52-week low of 47.55p. It has started to recover as the initial Brexit panic recedes, but is still a long way from stock of the year.
Stepping out
As ever with Lloyds, this year has been a case of one step forwards, two step backwards. Or should that be the other way around? The restoration of the dividend was a welcome leap ahead and right now the stock yields 3.76%, with the prospect of more to come. The forecast yield for December is 5.5%, and a juicy 5.9% for the end of 2017, even if these have been scaled back slightly. Who wouldn’t want to lock into such an income stream? Mind you, I made that argument when the share price was at 72p, and look what happened next.
Investors can brush off the embarrassingly public fallout from chief executive Antonio Horta-Osorio’s affair during a business trip to Singapore and should concentrate on the fundamentals. I’m not too concerned by the drop in its Tier 1 capital ratio to 10.1% in the recent EU-wide stress test, down from its 2015 year-end position of 13%. This remains significantly above the group’s minimum capital requirements and has even allowed Lloyds to boast of its “strong capital position.“
Half time
First half results were solid but unspectacular, with a 2% drop in underlying profit to £4.2bn for the first half and the underlying return on equity slipping from 16.2% to 14% year-on-year. The 13% rise in the interim dividend will have longer term (positive) consequences. However, these results were pre-Brexit, and an uncertain pointer to the future. While the Leave camp is crowing right now we won’t know the true impact of Brexit until Article 50 is finally triggered, which may not be for another year. Lloyds is still vulnerable to a domestic slowdown.
Investors will be buoyed by early signs suggesting the property market is holding up, helped by record low mortgage rates and the imbalance between supply and demand. However, earnings per share are forecast to fall 14% this year and another 14% in 2017, suggesting a bumpy road ahead. I still believe that Lloyds will deliver, but we may be in for a wait. Perhaps I should have named Lloyds my top stock for 2018.
