Shareholders in Lloyds Banking Group (LSE: LLOY) had a pretty dismal 2018. The value of their stock fell by more than 20%, nearly double the 12% drop seen in the FTSE 100. Today, I’m going to explain my view on Lloyds shares as we head into 2019.
The story so far
Lloyds’ performance during the first nine months of 2018 was pretty solid, in my opinion. Underlying pre-tax profit rose by 5% to £6.3bn, while the bank’s return on tangible equity, a key measure of profitability, rose by 2.5% to 13%.
The interim dividend rose 7% and shareholders also benefited from a £1bn share buyback, which the bank says was worth 4.5p per share.
However, the big institutional investors, whose buying and selling moves the market, aren’t interested in the past. They’re always trying to guess what will happen next.
In 2018, investors got worried about the economy and started selling UK-focused stocks. Lloyds’ focus on UK mortgages, car loans and credit cards meant that it was a big loser, as bad debts would probably rise sharply in a recession.
As things stand, a lot of bad news has been priced into Lloyds’ shares, but nothing has really gone wrong. Bad debt levels haven’t risen, and it passed the latest Bank of England stress tests with flying colours.
Buy, sell or hold?
We don’t yet know what will happen in 2019. But we do know that Lloyds shares have already been priced for a pretty gloomy outlook. They now trade on just 7 times 2019 forecast earnings, with a prospective dividend yield of 6.7%.
Unless Brexit has a much greater impact than expected, I think the shares could perform reasonably well from here. I’d rate Lloyds as a buy.
Another dividend bargain?
Another out-of-favour business I’d be happy to add to my own stock portfolio is furnishings and homewares retailer Dunelm Group (LSE: DNLM).
The share price of this family-owned FTSE 250 firm was up by 10% at the time of writing on Monday, after sales in the core business rose by 9.6% during the three months to 29 December. Like-for-like sales in the group’s stores rose by 5.7% compared to the same period last year, while sales on Dunelm.com rose by 37.9%.
These figures suggest to me that the retailer is still finding a way to attract more shoppers to its stores, despite the relentless growth of online shopping.
Profits could beat forecasts
The company says that it’s cautious on the outlook for the first half of 2019, “given the ongoing uncertainty in the UK economy.”
But chief executive Nick Wilkinson said that if its market continues to grow at the rate seen over the last six months, full-year profits could be “modestly ahead” of City forecasts.
I think Dunelm could be one of the best long-term buying opportunities in the retail sector. This business generated a return on capital employed of 30% last year, making it one of the most profitable firms of its kind.
I think the shares remain good value, despite today’s gains. Trading on about 14 times forecast earnings with a 4.3% dividend yield, I’d buy.
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Roland Head 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.