It’s not my intention to put the dampener on the festive season, but I’d be betraying The Motley Fool’s aim “to make the world smarter, happier, and richer” by not highlighting some of the FTSE 100 shares I think should be avoided in 2020.
The Fool’s mission statement requires us to identify some of the investment pitfalls out there as well as the brilliant buying opportunities, and so I’d be doing you a disservice by not talking about some of these high-risk blue chips that could sink in the New Year. So let’s jump in by taking a look at Lloyds Banking Group (LSE: LLOY).
New dividend worries
Contrary to what many market-makers had been hoping for following the Conservatives’ general election victory, 2020 looks likely to be another year packed with huge Brexit uncertainty and angst over the possibility of a no-deal withdrawal. With this comes the probability that the domestic economy will keep sagging this year and possibly even move into recession, keeping income on the back foot and the number of bad loans on its books rising (down 6% and up 31% respectively in the first nine months of 2019).
With this tough environment, worsened by the impact of a slowing global economy, comes the likelihood that the Bank of England will undergo more rate-cutting next year, adding another layer of pressure to Lloyds’ profitability in the near term and beyond.
It’s possible, though, that bad news surrounding the Lloyds dividend could be the real downward driver of the share price in 2020.
The tough trading environment and the huge impact of crushing fines related to previous misconduct is already casting a cloud over the firm’s ability to keep hiking annual rewards. But it is regulatory action this week from the Bank of England that has raised my fears for Lloyds shareholders.
The Footsie bank, like all of its banking peers, passed Threadneedle Street’s latest round of annual stress tests, it was announced on Tuesday. But on the downside — at least for Lloyds’ income-hungry shareholders — the Bank of England has demanded that the banks raise their counter-cyclical capital buffers to 2% next year from 1% at present.
The move is designed to keep the money taps on should the British economy suffer a severe downturn, allowing the banks to suck up as much as £23bn worth of losses without restricting lending to individuals or businesses.
The huge cost related to its PPI misadventure has already caused Lloyds to bang its share buyback programme on the head. And this move today raises questions over whether the business will be able to make good on City forecasts of another dividend hike this year, to 3.5p per share. I consider the business to be too risky for both growth and income investors as we embark on a new decade, and not even a rock-bottom forward P/E ratio of 9.1 times and large 5.5% dividend yield are enough to tempt me to invest.
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Royston Wild has no position in any of the shares 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.