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Why I think the Lloyds share price is the FTSE 100’s top dividend buy right now

At 59p, Lloyds Banking Group (LSE: LLOY) shares are on a forecast price-to-earnings multiple of only eight, way below the FTSE 100‘s long-term average of around 14.

Forecast dividend yields stand at 5.6% for 2019, rising to 5.9% for 2020. That’s no good if they’re not adequately covered by forecast earnings, but at Lloyds we’re looking at cover of around two times, and I see that as plenty good enough.

But if Lloyds shares are such a screaming buy, surely everyone should be able to see it and, well, the valuation would be a lot higher and they wouldn’t be such a screaming buy?

So what do I think I know that the market doesn’t? Well, obviously, nothing, but it’s all about how we individually assess what’s known.

The bear case

To try to evaluate the Lloyds share price fairly, it pays to put aside any optimism we might feel and look at the opinions of those who don’t share it. So what are the risks at Lloyds? The obvious big one is Brexit, but I’ll set that aside for now and look at what else there is.

My Motley Fool colleague Royston Wild is bearish on the prospects for Lloyds, and I think he explains the downside well.

One inescapable fact is that the economic environment we’re currently in is nowhere near as attractive for banks as it was a decade ago, even without the concerns of Brexit. Banks do best when interest rates are up and lending is strong, giving them more margin over base rates and higher lending levels generally.

As Royston points out, economic growth is slowing across the world and central banks have been cutting base rates for years in an attempt to create stimulus. If we were seeing signs of any economic boost as a result, the outlook for the banks would be more attractive. But we’re not, and pressure on base rates is still downwards.

Competition

The great banking crash disillusioned a lot of savers and borrowers, who no longer have the same faith in the big banks that they used to. That’s opened a big opportunity for the so-called challenger banks, and they’ve been slowly picking up market share. They don’t have the baggage that the big banks are carrying, and obviously aren’t losing billions in PPI compensation.

But, while I agree that these downsides are genuine and serious, the big drag on the Lloyds share price really is Brexit, as attested by the share price slump when the chances of Boris Johnson getting his ‘deal or no deal’ departure looked realistic, followed by a recovery when parliament made it clear he wasn’t going to have it so easy.

Pessimism overdone

I’m increasingly convinced that there’s enough common sense in our politicians (difficult though that might be to accept at times) that we’ll not crash out of the EU without a deal. And if that’s finally, firmly, moved off the table, I think the Lloyds share price valuation would look considerably lower than it needs to be to compensate for the tough economic environment and the rising competition.

In tough times, I want to be invested in the big players, and I want to keep pocketing that fat Lloyds dividend.

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Alan Oscroft owns shares of 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.