In recent weeks, Lloyds Bank (LSE: LLOY) shares have plummeted due to the economic uncertainty associated with the coronavirus outbreak. In the space of just a month, Lloyds’ share price has fallen from around 57p to 43p, a decline of about 25%.
After such a significant share price fall, many investors are likely to be wondering whether Lloyds shares are now a bargain. With that in mind, here’s my take on the investment case for Lloyds.
Rising dividends
Let me start by saying that Lloyds is a stock I’ve been relatively bullish on over the last few years. The bank has come a long way since the dark days of the Global Financial Crisis and profits have been on the rise. Dividends have also been on the up, and the yield on offer from the FTSE stock has often been very attractive.
While recent full-year results for FY2019 were a little disappointing (mainly due to the significant cost of PPI charges), with earnings per share dropping from 5.5p to 3.5p, the bank still raised its dividend by 5% to 3.37p per share. That marked five consecutive dividend increases since the bank reinstated its dividend in FY2014 – a decent achievement. The group said that it “faces the future with confidence”, and that it remains well placed to “deliver strong and sustainable returns for shareholders” going forward.
It’s worth noting that City analysts currently expect earnings per share of 6.82p this year, along with a dividend payout of 3.5p per share (a yield of around 8% at the current share price), which would represent a 4% increase in the dividend.
Coronavirus impact
The problem now, however, is that the implications of the coronavirus outbreak add a high level of uncertainty to the investment case.
As a UK-focused bank, Lloyds is highly exposed to the fortunes of the UK economy, which in turn, is exposed to global activity. If the coronavirus results in a severe economic contraction, which it may well do, Lloyds profits are likely to take a further hit. This could impact the bank’s ability to grow its dividend and result in a further share price fall.
This is a risk that shouldn’t be ignored. Many experts now believe that UK economic growth is likely to stall in the near term. For example, last week, analysts at Deutsche Bank halved their UK growth forecast for this year to just 0.5%, a post-Global Financial Crisis low, because of the outbreak.
Lower interest rates (the Bank of England has today slashed its base rate from 0.75% to 0.25%) are another problem for Lloyds. This is due to the fact that rate cuts reduce banks’ net interest spread – the difference between borrowing and lending rates. Again, this is likely to impact Lloyds’ profits and potentially its dividends.
Overall, the investment case for Lloyds now looks far riskier.
Speculative buy
That said, the stock does now look cheap. Assuming zero earnings growth this year, the P/E ratio is 12.4. And if we plug in the consensus earnings forecast of 6.8p, the P/E ratio is just 6.4.
All things considered, I see Lloyds as a more speculative buy right now. There are risks to the investment case, however, if you’re willing to hold the stock for a few years, I think there’s a chance you could be rewarded, given the stock’s low valuation.
