The Lloyds Banking Group (LSE: LLOY) share price has frustrated shareholders for years. After the plunges associated with the great financial crisis of the noughties, the stock first rebounded to its current level near 50p around a decade ago!
But I think the status quo could be about to end, leading to a decisive move that may change everything for shareholders, and not in a good way. And it’s all because of one big thing.
The gathering storm
Last Wednesday’s half-year report knocked the share price lower because it revealed to the stock market pre-tax profits that came in weaker than expected at £2.9bn. Previously, City analysts following the firm had around £3.45bn pencilled in for the period, so it was a significant miss. Part of the problem is that Lloyds made a further £550m provision in the accounts to meet ongoing claims from customers for mis-sold payment protection insurance. The old sore continues to weep, but I think such legacy issues are a sideshow for shareholders.
The bank has far bigger things to worry about looking ahead. The stand-out for me in the interim report is chief executive António Horta-Osório’s commentary. He explained that Lloyds has a “clear” focus on the UK and the firm’s operational performance is, therefore, “inextricably linked” to the health of the UK economy. He said that ongoing economic uncertainty is affecting business confidence and causing “softening in international economic indicators.” To me, that sounds like a warning of trouble ahead, and it chimes with recent statements from well-known fund manager Neil Woodford.
A bleak picture
In last week’s email from Neil Woodford to those invested in his funds, he fired off a similar assessment of economic conditions around the world. He thinks the global economic environment “is not as robust as equity markets are implying,” arguing that growth in the US is stalling, parts of Europe are “barely growing at all,” and there are“problems” in emerging market economies.
To me, this all seems to express what I believe the stock market has been worried about all along with Lloyds. For a decade the valuation has looked ‘ridiculously’ low. Indeed, that’s why many investors have been attracted to the stock. But in pegging the valuation and even pushing it lower as earnings have been rising, I think the stock market is doing what it should be doing – it’s trying to anticipate conditions ahead.
Remember that Horta-Osório said Lloyds’ performance is linked to the health of the UK economy. You bet it is, and the economy is the one big thing that could change everything for the stock. Lloyds is about as cyclical as a cyclical stock can get. If the UK economy takes a dive along with the worldwide macro-economy, my conviction is that Lloyds’ profits will bomb, along with its share price and the dividend payments. Indeed, we could be edging towards a dramatic end to the status quo when it comes to the performance of Lloyds.
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Kevin Godbold has no position in any share 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.