Lloyds (LSE: LLOY) shares have been a disappointment in 2018, so far. Starting the year at 68p, Lloyds share price has fallen to 57p today – a year-to-date fall of 16%. So, why is that? Let’s take a closer look at the reasons I think are behind the poor performance.
FTSE 100 fall
For starters, it’s worth pointing out that the market as a whole has also had a poor year, so far. With the FTSE 100 falling sharply in recent weeks, the index is now down around 8.4%, year to date. So Lloyds is not the only stock to dip this year. And the banking sector has struggled in 2018 as investors have become concerned about global growth, with other FTSE 100 banks hit hard too. HSBC Holdings is down 17% this year, and Barclays has fallen 16%.
Then we have ongoing Brexit uncertainty, which isn’t good for Lloyds as the bank generates all of its revenues from the UK, as is therefore seen as a proxy for the UK economy. The Brexit saga just continues to drag out. Will it be a hard Brexit or a soft Brexit? Will a deal ever be done? What will the implications for UK economic growth be? These are questions we don’t have answers to right now, and the uncertainty is spooking investors. If the UK did experience an economic downturn, or a housing market crash as a result of Brexit, profitability at Lloyds could suffer.
Next up, PPI claims. Lloyds has so far paid out £18bn to affected customers. While the bank reported no additional claims in its recent Q3 results, some investors are concerned that there could be a rush of late claims before the 29 August 2019 deadline. This adds more uncertainty to the investment case, as high levels of claims could potentially impact the group’s ability to pay its dividend.
It’s also worth noting that Lloyds may have disappointed some investors on the dividend front this year. This time last year, City analysts were expecting a dividend payout of 4p for FY2017. However, the bank ended up declaring a divi of 3.05p per share, directing extra cash towards a share buyback. Although this still represented a dividend hike of 20%, it was slightly disappointing for those who were expecting massive cash payouts from Lloyds.
Furthermore, City analysts have continually downgraded their dividend forecasts for Lloyds this year, and this won’t have helped the share price. For example a year ago, analysts were expecting a dividend payout of 4.48p per share for FY2018. Now, however, the estimated payout for this year is 3.26p per share. That’s a big downgrade. With less cash flowing to shareholders than previously anticipated, perhaps some investors have decided to look elsewhere for income.
So, there’s the five reasons why Lloyds share price has fallen this year.
Having laid out that explanation, I’m happy to say that I’m holding onto my Lloyds shares, for now. Sure, there are risks to the investment case, but I believe these are built into the stock’s low valuation at present. In my view, recent Q3 results looked solid, as underlying profit rose 5% and the bank reported no deterioration in credit risk. With Lloyds shares offering a prospective yield of 5.7% right now, I’m content to sit tight, and pocket the big dividends on offer.
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Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and 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.