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Is it time for investors in Lloyds Banking Group to admit defeat?

How long can a bad thing last? If you are talking about the post-financial crisis banking sector, the answer is a very long time indeed. But is there any light at the end of the tunnel?

Bad banks

Lloyds Banking Group (LSE: LLOY) saw its share price peak at a mighty £5.67 in April 2007, which isn’t far off a decade ago. Today, you can pick up its stock for the apparently bargain price of 55p, less than one-tenth of its former high. It may look like a bargain but be warned — plenty of investors have been tempted by such a prospect, only to get badly burned.

If you bought the stock one year ago today, your holding is now worth 28% less. Today’s price of 55p is well off its 52 week-high of 77.52p. Investors patiently waiting for the great leap forwards have to face facts: they have been moving backwards instead. So is it time to pack up and go home?

Storm clouds

I can see little sign of a quick comeback. Life is set to remain tough in the banking sector, as the string of regulatory and mis-selling crackdowns is far from over. This will continue to cast a cloud over wider investment sentiment, even if Lloyds keeps its nose completely clean (unlikely, given that it was the worst PPI offender).

Lloyds does have some insulation against Brexit fall-out, because in its new stripped down version it is primarily a play on domestic retail and small business sectors. However, it will be punished by lower interest rates, as this will squeeze net interest margins. If Brexit shrinks the UK economy it will share in the pain, with rising customer defaults and slower lending growth. Hence its post-referendum share price ravaging.

Bottoming out

Banking sector sentiment is rock bottom now, but this could actually make Lloyds tempting. For a start, it now trades at 6.49 times earnings. I nearly said “a bargain 6.49” but that would be silly, because nobody knows what represents good value in this sector anymore. Still, it is low. Even better, share price slippage means that the dividend has now increased to 4.11%, at a faster pace than analysts originally predicted.

With cover of 3.8 there is plenty of scope for growth, and the yield is forecast to hit 5.5% by the end of the year, which would be a festive present. By Christmas 2017 it is expected to hit 6.3%, potentially making it the gift that keeps giving. A low price-to-book ratio of 0.8 suggests that the stock is undervalued and in many respects, it is.

Income joy

That’s my jolly positive side talking. One glance at Lloyds’ earnings per share forecasts are enough to plunge me back into gloom. EPS is forecast to drop by 14% in 2016, followed by another 17% drop in 2017. Revenues and profits are expected to slip next year. Lloyds still faces a long climb back to respectability.

However, let’s not be too gloomy. As the search for yield intensifies, this prospective income stream is almost as juicy as it gets. Investors in Lloyds should stay faithful for the dividend income, while treating any share price growth as a bonus.

The doom-mongers say Brexit is a disaster for the UK, but it has been great news for the FTSE 100.

Still, it is early days and if Britain does slide into recession the turbulence will return with a vengeance.

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Harvey Jones 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.