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Lloyds Banking Group share price weakness, and what I’d do about it

Since a recent peak on 21 October, the Lloyds Banking Group (LSE: LLOY) share price has fallen back by nearly 8%, and there’s been hardly any movement since a Q3 update was released on 31 October.

The lack of enthusiasm seems to stem from the figures having been overshadowed by PPI, which added a further £1.8bn charge in the third quarter. It knocked statutory pre-tax profit down to £2.9bn, pretty much obscuring the progress being made across the rest of the bank’s business.

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The bank reported an underlying pre-tax profit figure of £6bn, which I’m impressed by at this stage, but renewed talk of “continued economic uncertainty“, which Lloyds said “could further impact the outlook” took the shine of that a little, and left the City still very cautious.

Another thing that seems to have turned some investors away from Lloyds was the suspension of the final £650m of its planned share buyback. That was announced in September after the whole sector was hit by bigger-than-expected last-minute PPI claims, and as a result of the uncertainty over the final costs of the affair.

I think that was entirely sensible, as my biggest reservation over Lloyds in recent years comes from wondering if the bank was escalating the amount of cash it was handing back a little too quickly. Now, don’t get me wrong, I love a juicy dividend as much as the next investor – but I don’t want it at the cost of increased long-term risk to the company. Was Lloyds trying just a bit too hard to attract the investors back and show that it was back to health?

Short term?

Sadly, there still seems to be an attitude today among City institutions that the only thing that matters is the next quarter’s results, the next dividend, and so on, and it’s rare to see analysts with a focus on the long term. I also see too much concern over current share prices, and too many companies spending more time than I think is healthy worrying about them. It’s to be expected, though, when top company managers are so strongly incentivised by share options.

I reckon if you look after the business, the share price will look after itself.

But where does that leave Lloyds now? Well, there are good reasons to be cautious, and the post-Brexit outlook for the sector is a major one of them. But I do think we’ll see an uprating for banking shares if the PM’s deal passes Parliament after the election, and I think it will be deserved as I still maintain that the UK’s banks are significantly undervalued.

Lloyds shares are on forward price-to-earnings ratios of under 8, based on current forecasts, and the 6% dividends are covered twice by predicted earnings. While I think I would have preferred Lloyds to hold back more cash and be a bit less ambitious in its dividend and buyback plans, at least until we’d seen a couple of years of post-Brexit trading, I still think the shares are undervalued.

I hold Lloyds shares, and I may well buy some more before the end of January.

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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.