The Motley Fool

This is what I’d do about the Lloyds share price right now

Image source: Getty Images

Over the last 10 years, Lloyds Banking Group (LSE: LLOY) has worked hard to rebuild its reputation as a low-risk income stock.

In this piece, I’ll give my verdict on today’s 2018 results and explain whether I’d buy the bank’s stock.

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...

A solid performance

The bank’s after-tax profits rose by 24% to £4.4bn last year, while revenue rose by 2% to £17.8bn.

Lending growth slowed and both mortgage and credit card lending was broadly unchanged last year. However, lending to small- and medium-sized businesses grew, as did motor finance. The group also reported a sharp increase in loans to wealthy customers.

Much more profitable

When profits rise faster than revenue, it normally means a company’s profit margins have improved. That’s what’s happened here. Lloyds’ net interest margin — a measure of lending profit — rose from 2.86% to 2.93%.

Alongside this, tight control of costs saw the bank’s costs, measured as a percentage of revenue, fall from 51.8% to 49.3%.

The end result was that the bank delivered a return on tangible equity of 11.7%, up from 8.9% in 2017. This is a key measure of profitability for banks — and Lloyds’ performance is much better than key rivals.

Rival bosses will be green with envy

I apologise for these rather dry figures — but for banking investors they’re pretty impressive. Certainly the bosses of rivals such as Barclays and RBS may feel slightly envious today. Both men are still struggling with costs that account for more than 60% of their banks’ income, and returns on tangible equity of less than 5%.

Barclays and RBS may offer an interesting opportunity for value investors, but for income investors, today’s figures confirm my view that Lloyds is probably still the safest buy in British banking.

Focus on shareholder returns

Some shareholders may be disappointed that despite the bank’s earnings per share rising by 27% 2018, the dividend has only been lifted by 5%.

Instead of returning more cash to shareholders directly, the bank has decided to return cash through a £1.75bn share buyback. This equates to an extra 2.46p per share. Combined with the 3.21p dividend, it will take total shareholder returns for 2018 to 5.66p, or around 9.4%.

That’s not to be sniffed at. But the problem with buybacks is that unless you sell your shares, you don’t see any extra cash in your pocket. So why is Lloyds’ chief António Horta-Osório buying back shares instead of hiking the dividend?

I suspect the answer has two parts. Firstly, the current dividend provides a yield of almost 5.4%, which is probably high enough to attract income investors. The second reason is that by returning surplus cash through buybacks, Horta-Osório is laying the groundwork for an uncertain future.

If Lloyds has fewer shares in circulation, then it will be easier for the bank to generate earnings per share growth and to increase its dividend, even if profit growth slows.

Is this the right time to buy?

Lloyds’ last-seen share price of 61p values the stock at about 1.1 times its tangible net asset value. The dividend yield of 5.4% looks tempting to me and buybacks should ensure that there’s still room for dividend growth, even if profits are flat this year as forecasts suggest. In my view, these shares remain a dividend buy.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head owns shares of Royal Bank of Scotland Group. The Motley Fool UK has recommended Barclays 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- 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.