MENU

4 reasons the cheap Lloyds share price doesn’t appeal to me

Image source: Getty Images.

Lloyds Banking Group’s (LSE: LLOY) share price is still  failing to ignite despite its low valuation (a low forward P/E ratio of 9.2 times, to be precise), as well as its gargantuan dividend yields. This isn’t a surprise to me, however.

UK not A-OK

The main issue troubling investor appetite for Lloyds is the sign that the British economy is really starting to toil. GDP growth in the first quarter skidded to just 0.1%, the worst rate of expansion since 2012 and things are unlikely to pick up any time soon as the possible outcome of Brexit negotiations remain as clear as mud.

And as my Foolish friend Peter Stephens was quick to explain recently, weak economic conditions in the UK mean further interest rate rises could well be kicked into the long grass by the Bank of England, another possible drag on earnings growth.

A lack of foreign exposure

Unfortunately the impact of massive restructuring over the last decades leaves the Black Horse Bank particularly susceptible to a massive cooling of the UK economy.

While Barclays boasts a considerable presence in the United States, and HSBC and Santander have particularly large exposure to Asia and Latin America respectively, Lloyds does not have access to such hot growth markets to drive earnings now and in the years ahead.

The FTSE 100 firm may have been viewed as a safe pair of hands as it significantly de-risked and dialled back its geographic footprint in the wake of the 2008/09 global recession. But these measures are likely to cause earnings growth to significantly lag those of its industry competitors looking down the line.

Misconduct costs still rising

Those expecting Lloyds’ colossal PPI misconduct costs to screech to a halt soon are also likely to remain disappointed.

Sure, the summer 2019 claims deadline imposed by the Financial Conduct Authority provides some light at the end of the tunnel. But there are signs that the London bank faces much more trouble before things get better.

Lloyds chalked up another £90m worth of mis-selling costs during January-March, bringing the total amount set aside to cover the costs of the scandal to within a whisker of £19bn.

Better dividend shares out there

As I already said, one of the biggest appeals of Lloyds is the possibility of market-mashing dividends in the near term and beyond.

City analysts expect it to keep lifting shareholder payouts and these clock in at 3.4p and 3.7p per share for 2018 and 2019 respectively, up from 3.05p last year. Thus yields stand at a brilliant 5.1% and 5.6% for this year and next.

But I am concerned that the poor outlook for the UK economy, allied with the onset of ever-increasing competition in key areas like mortgages, means that Lloyds may struggle to keep dividends on an upward slant as profits growth likely grinds to a halt.

For those scouring the Footsie for progressive dividend payers, there are many big yielders in much better shape than Lloyds to keep delivering increases in annual payouts, GlaxoSmithKline and National Grid being just a couple of examples.

Buy-And-Hold Investing

Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it immediately with no obligations whatsoever!

Royston Wild has no position in any of the 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.