The stock market crash has taken its toll on almost every FTSE 100 share, but some are hit harder than others. One example is Lloyds Banking Group (LSE: LLOY), whose share price had fallen by almost 50% from the start of the year to 32p at the last close. It now has a price-to-earnings (P/E) ratio of 9.3 times and a dividend yield of 10.5%. On the face of it, there’s a lot going for the stock. It’s inexpensive and promises a high passive income. There couldn’t be a better combination, really.
But as a long-term investor, I’m interested in two things. One, that a share’s price should appreciate overtime. Two, that it should continue to offer a high dividend income.
Economic downturn will impact Lloyds Bank
I’d think twice before investing in Lloyds Bank for capital appreciation. Banks are sensitive to downturns. Incoming macroeconomic projections for the next quarter are grim. Presumably, the effects will carry on into the quarters after that as well especially since there’s no way of knowing how long the coronavirus-driven lockdowns are going to stay. This will impact LLOY. Already, the stock’s performance since 2008 shows that it might not turn out to be the best bet. The Covid-19 crisis is fundamentally different from the financial crisis. But the fact remains that its effect is still recessionary.
Policy to the rescue
The Lloyds share price might rise in the short term. There has been a lot of policy support in the recent past. The Bank of England (BoE) has cut rates to a low 0.1%, the government has made financial commitments to keep businesses and livelihoods from falling apart, and there’s global quantitative easing underway. These can help, and I do believe that financial markets will start picking up sooner than the overall economy because of this. This in turn will positively impact Lloyds’ share price.
I’m not sure if it can be sustained though, because its fundamentals may well be on shaky ground if the downturn continues. Already, the past year saw a come-off in profits for Lloyds because of PPI claims and overall economic uncertainty. There was hope of better performance in 2020, but of course that’s quite unlikely now.
Can Lloyds maintain its dividends?
That leaves us with dividends. I think we should factor in the risk that dividends might cease to be paid altogether. While Lloyds has been paying dividends consistently every year since 2015, between 2009 and 2014, it didn’t. Like many other financial services organisations, it also suffered from 2008’s financial crisis. It started paying dividends again only once it turned profitable. I’m not sure it will happen, but the economy is grinding to a halt, which impacts credit offtake. I’ll be looking more closely at BoE’s credit numbers to get perspective on banks’ fortunes. Till then, I think there are less risky dividend generating stocks to consider.
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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.