The Motley Fool

3 strong clues that Lloyds Banking Group plc may not see 100p

As I write, Lloyds Banking Group (LSE: LLOY) trades at 63p but the firm’s shares first reached that level back in 2013 after the financial crisis – almost four years ago. Let me tell you why I think it unlikely Lloyds will ever see 100p.

How long is the long haul?

Between 2013 and now, the shares have been as high as 88p and as low as 50p. That’s a tight range and not the performance many were expecting, I would guess, especially those buying Lloyds for its recovery potential during the last four years.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Which begs the question, how long is the long haul? Maybe it’s time to give up on an investment like Lloyds that has remained mired in the mud for so long. Those looking for growth or recovery could be in a for a very long wait. I see three strong clues pointing to a potentially lacklustre performance from the firm over the coming years. Here’s why…

1. Negative relative strength

The first clue is the stock’s record of negative relative strength. Despite buoyant stock market conditions and Lloyds’ opportunity to recover from its financial-crisis lows, the firm’s share price shows negative relative strength over the periods of three years, one year, three months and one month.

I would argue that’s not typical behaviour for an underlying business that is in recovery or in growth mode.

2. Lack of earnings growth

The second clue is a lack of earnings growth. Earnings did bounce back after the 2008 financial crisis and even this year City analysts expect a strong uplift in net profits and earnings per share. But I’d argue that the forward-looking stock market anticipated this recovery and accommodated that in the strong upsurge in Lloyds’ share price between 2011 and 2013.

Forward projections suggest a small decline in earnings and profits for 2018 instead of the roaring double-digit percentage increases we normally associate with stocks in a healthy growth or recovery phase.

3. Low dividend cover from earnings

The third clue is the forward dividend payout will only be covered just under 1.7 times by anticipated earnings for 2018.

Firms expecting growth tend to have higher earnings cover as they re-invest incoming cash flow into capital investment for growth. When the directors see no opportunity to invest like that they often pay the money out in dividends to shareholders.

The vulnerable dividend

With no apparent growth or recovery potential on the table, the attraction must be for income from the dividend yield. However, the cyclicality of Lloyds’ business makes the payout vulnerable and if the dividend crumbles the share price will surely follow.

Because of the cyclical risk from this elevated position of recovered earnings, I reckon Lloyds has more downside risks than upside potential, which looks set to keep the market reducing the valuation and making it hard for Lloyds to break to 100p and beyond. That’s why I’m avoiding the firm’s shares.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.