The Motley Fool

Lloyds shares: why I think investors could be in for a bumpy ride

Image source: Getty Images.

2019 has been a rollercoaster ride for Lloyds Bank (LSE: LLOY) shareholders so far. Starting the year at 52p, Lloyds’ share price surged nearly 30% in the first few months of the year to hit 67p by mid-April, but since then, the shares have underperformed and fallen back to 50p.

Looking ahead, I think there could be plenty more turbulence on the horizon for Lloyds shareholders, unfortunately. Here’s why.

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...

Risks

Back in late July, I penned an article that looked at four key risks that Lloyds faced. These included the UK economy/Brexit, interest rates, payment protection insurance (PPI) claims, and FinTech. Today, these risks are all still highly relevant.

However one in particular concerns me a lot and that’s PPI claims. With the PPI deadline (29 August) just days away now, and many people scrambling to complete a last-minute claim, I think there’s a chance PPI claims could hit Lloyds’ near-term profits significantly.

Last-minute PPI claims

In the bank’s most recent half-year results that were released at the end of July, Lloyds announced that it had set aside another £550m to pay for PPI claims. That figure was worse than City analysts were expecting. 

However, what worries me is that research from the Financial Conduct Authority (FCA) released last week showed that nearly one in five people were still deliberating over making a claim and that around half of these people were “confident” that they would complain ahead of the deadline.

The FCA’s research – which has been released by the regulator in an effort to encourage people to act as soon as possible – also revealed that in the past eight weeks, since its final PPI push went live, there has been a 420% increase in online activity associated with PPI claims, compared to the previous eight weeks.

These findings suggest to me that Lloyds could be set to face a large number of claims in the lead-up to the deadline. What impact this will have on second-half profits is impossible to know right now, but I think it could be substantial.

Add in all the risks associated with Brexit and the near-term outlook for Lloyds certainly looks challenging. For shareholders, the next six months could be turbulent period.

What I’d do

That said, at a share price of 50p, you have to wonder how much of this risk is baked into the investment case right now. Analysts currently expect Lloyds to generate earnings per share of 7.6p this year, which puts Lloyds shares on a forward-looking P/E ratio of just 6.6 – a little over half the median forward-looking P/E ratio of all FTSE 100 companies. That’s certainly not a demanding valuation. And assuming the bank doesn’t need to slash its dividend payout as a result of PPI claims, there’s also a big yield on offer for investors.

Given this rock-bottom valuation and big dividend yield, I see Lloyds as a ‘hold’ at the moment. While the near-term future looks challenging, I’ll be holding on to my shares and focusing on the long term. 

“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!

Edward Sheldon owns shares in Lloyds Banking Group. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. 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 click below to discover how you can take advantage of this.