Lloyds Banking Group (LSE: LLOY) is a popular stock with private investors. In some ways, that’s not surprising because it is one of the largest companies in the FTSE 100 index. Its market capitalisation today stands close to £43bn.
The firm has also been sporting some enticing value indicators for a few years. With the share price close to 62p, the forward-looking earnings multiple for 2020 is just below 9 and the price-to-book value is a little under 0.9.
But it could be the dividend that gets most people excited. The anticipated yield is running at around 5.7% for next year, which looks like a juicy payment.
Capital losses versus dividend gains
My guess is that some people have bought the stock in the past for its recovery prospects. After all, the share price plunged more than 90% in the aftermath of the credit-crunch last decade. However, over the past five years, an investment in Lloyds will not have worked out so well. In December 2014 the share price was around 75p, which compares to about 62p today.
If I’d bought some of the shares back in 2014, I’d be sitting on a capital loss worth 13p per share, which is just over 17%. Over that period, according to my sums, I’d have collected just under 14p per share in dividend payments. Adding that back in makes the total gain over the period just one penny, which works out to just over a 1.3% total return, which is poor performance indeed for a five-year holding period – my initial £1,000 investment would have grown to just £1,013.
And it could have been worse. For example, the share price dipped as low as 48p in August 2019 and has been volatile over the entire period. I reckon those holding the shares for a recovery will have been disappointed. Dividend payments have stopped a five-year investment from losing too much, but will they offer such protection over the next five years? I’m not so sure.
Challenged by its cyclicality
To me, Lloyds stock faces a lot of downside risk. Before it’s anything else, Lloyds is a cyclical company and at this stage probably deserves the low-looking valuation the stock market has assigned it. Profits have been relatively high for several years and, at some point, we could see a general economic downturn. My guess is that the market will keep the valuation pegged down in anticipation of falling profits later.
In the meantime, is it worth collecting those fat dividend payments? Not to me. After all, back in 2009, the share price went as low as about 26p. If it should go anywhere near that level again, the more than 50% plunge could wipe out years’ worth of dividend income. I’m not prepared to tie my money up in Lloyds for the next five years to see whether that scenario plays out.
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.