The FTSE 100 banking giant Lloyds Banking Group (LSE: LLOY) isn’t in a good place. Its share price dropped to a four-month low of 55.3p at the last close. What’s worse, it’s also down by 13% from the start of 2020.
Broader stock-market plunge
As an investor, should I now be worried about Lloyds’s share price fall? I’d take some comfort by considering the larger context. The bank’s part of the FTSE 100, which too has declined from the start of the year, though by a far smaller 2.6%.
Rising global uncertainty, led by fears of the coronavirus, has impacted the overall stock markets. It’s to be expected that a cyclical stock like LLOY sees a sharper dip. The fall wouldn’t be particularly worrisome if the uncertainty had been contained. Unfortunately, it hasn’t, as the virus’s impact is getting bigger as it spreads outside China.
Tied to the economy
Added to this is the fact that the UK economy isn’t entirely out of the woods either. In the last quarter of 2019, UK’s growth showed no change from the quarter before. Forward-looking indicators do suggest recovery, but I’d wait for confirmation from official numbers. This will inform me of both whether the recovery is taking place and if it is, the extent to which it’s occurring.
If the recovery is weak, it may mean nothing for LLOY. If it is robust, however, banking of all the sectors could be in for good times given how tightly it’s linked to economic conditions. But we don’t know that for certain right now. In fact, further spread of COVID-19 could put a dent to UK’s recovery, at least in the short term. Over the longer term as well, it’s a wait and watch situation. The economic outcome will also be influenced significantly by Brexit negotiations with the EU.
Investing for high passive income
With so many question marks about the future, I’d be particularly cautious of investing in LLOY for capital gains. The share doesn’t have a good track-record of recovery for the patient investor. Even if I consider its performance over a shorter time frame, it has been disappointing. Over the past five years, on average, the LLOY share price has risen by just a little over 2%. Many other FTSE 100 stocks have shown much better performance over the same period.
I do like its 6.1% dividend yield, however. It’s significantly above the FTSE 100 average yield and there’s reason to believe that dividend income will continue to be rewarding for investors. LLOY increased the payout in 2019 by 5% to 3.37p from the year before. In its latest financial results, it says that it will “continue to target a progressive and sustainable ordinary dividend”.
For the foreseeable future, I’d consider LLOY as an income investment. I’d only look at it as a growth investment if was really optimistic. At the very least, I’d like to see more concrete evidence that the share price is on an upswing before investing for capital appreciation.
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Manika Premsingh 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.