Warren Buffett famously said we should “be fearful when others are greedy and greedy when others are fearful,” and there’s certainly been evidence that big investors have been fearful of Lloyds Banking Group (LSE: LLOY) in the past few years.
The main indicator comes in the valuation of the shares, which are trading on a P/E multiple of around 8.5, based on expected 2019 results (due on 20 February, so mark that key date in your diary).
But Lloyds was one of the five most popular shares traded at Hargreaves Lansdown in 2019 — in terms of net buys, and excluding investment trusts. So it seems a lot of private investors have been getting greedy about the depressed shares. And that’s definitely helped the price, which is up 24% in 2019 to date — by comparison, the FTSE 100 has gained 13.5%.
The shares are still way down over five years, with a fall of 14%, but the low price has boosted the dividend yield, now forecast to deliver 5.4% this year and 5.6% next. So those being greedy in 2019 have, I reckon, set themselves up for a very nice income stream over the next decade and hopefully more.
It’s noticeable that the Lloyds share price recovery faltered and reversed when the PPI deadline was getting closer and the unexpected volumes of claims required the bank to set aside considerably more cash than was expected, and we even saw a 5% decline year-to-date by late August.
But after the deadline passed, the shares quickly climbed back up again to notch up that impressive overall gain, which shows the impact that the uncertainty was having, and how quickly markets can react once uncertainty is ended.
Is the 2019 greed justified, and should it continue into 2020? I think the answer is yes.
The B word
While the PPI scandal was a weighty anchor on the Lloyds share price, the obvious big downer has been Brexit. On the one hand, Lloyds does almost no business with the rest of Europe, so it doesn’t have EU trade to lose. But on the other hand, being focused on just a single market in the UK leaves a bank, especially a retail-focused one, highly susceptible to any downturn in our domestic economy.
That’s a risk with any business, and it’s why I generally prefer the safety margin that comes from investing in stocks with a worldwide outlook — but I bought Lloyds shares because I thought they were just too cheap.
The worst fear was of a no-deal Brexit. If that happened, according to most economists, we’d see a pretty severe few years. That would most likely lead to a fall in mortgage demand, and some of Lloyds’ debts turning bad — it would be a bad thing for the banking sector all round.
But the threat of that has receded considerably (even though it hasn’t quite gone away), and I think that’s brightened the outlook for Lloyds by some margin.
EU trade negotiations will last pretty much all year (and, thanks to the PM’s latest bizarre act, currently can’t go beyond), and that means we still have a year of uncertainty ahead of us.
But on the bright side, I think that extends the greed opportunity too. I might even buy some more.
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Hargreaves Lansdown and 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.