Forget the Lloyds share price crash! I’m not buying as dividend cut fears grow

Royston Wild discusses Lloyds Banking Group’s 9%+ dividend yield and asks: is the bank a brilliant buy today?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lloyds Banking Group (LSE: LLOY) has never been an appropriate pick for growth hunters. Certainly not in a post-financial-crisis era of low central bank interest rates and profit-crushing misconduct penalties.

What it lacked in growth however, it more than made up for in dividends. The fruits of huge restructuring, allied with the support offered by a resilient, strong economy gave it the financial firepower to increase annual dividends again and offer investors the chance to gobble up some truly handsome yields.

Just as a high tide lifts all boats, the market panic of the past six weeks has caused stocks both good and bad to crash through the floor. And at current prices, Lloyds offers a bulging 9.1% dividend yield for 2020. Is it too cheap to resist?

Fear factor

I’ve been fearful over the FTSE 100 firm since the fallout of the summer 2016 European Union referendum.

The prospect of a prolonged and painful withdrawal from the continental trading club promised massive short-to-medium-term profits turbulence for the likes of Lloyds. It threatened to put the cosh on profitability over a longer time horizon too as Britain adjusted to Brexit. I don’t think I was being overly bearish, either. The steady stream of disappointing trading data from across the banking sector is proof of this.

But the economic turbulence caused by Brexit pales into insignificance compared to the damage that the coronavirus promises to wreak on Lloyds and its peers. Certainly in the near term. It threatens to rock the domestic economy like nothing any of us have likely seen in our lifetimes, as forecasts from the Centre for Economics and Business Research (CEBR) suggest.

The body predicts that a 0.5% dip in national output in the first quarter of 2020 will worsen to a staggering 15% drop in the June quarter. This would represent the sharpest decline since 1997.

With consumer spending predicted to topple, unemployment rates set to boom and business investment tipped to dry up, the CEBR reckons that the UK economy will shrink by 4% over the whole of 2020.

What should you do?

City analysts don’t expect Lloyds and its progressive dividend to remain intact following the Covid-19 outbreak. They reckon that the annual dividend will be hacked back to around 3p per share from 3.37p in 2019.

But I worry that the banking colossus might be forced into even more swingeing cuts. Firstly, that predicted payout is covered just 1.7 times by anticipated earnings, below the widely-regarded security benchmark of 2 times.

Lloyds likely won’t have the balance sheet strength to make up for this shortfall either. In October it axed its share buyback programme in response to ballooning PPI-related financial penalties. The bank might have sailed through the worst of this particular saga, sure, but the fallout of the coronavirus tragedy threatens to cause even more chaos for its capital-building plans.

As I said earlier though, Covid-19 isn’t the only thing Lloyds investors need to contend with. Brexit also casts a cloud over the bank and its ability to keep paying market-beating dividends. So ignore that 9%+ dividend yield, I say. There’s a galaxy of stronger income shares for bargain hunters to load up on today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »