One of the big attractions of Lloyds Banking Group (LSE: LLOY) has been its dividend. But since the Covid-19 pandemic started, some investors had been getting rather concerned. And it’s been hitting the Lloyds share price. There were similar worries about Royal Bank of Scotland (LSE: RBS) too. RBS had been a couple of years behind Lloyds in its recovery from the banking crisis. But the bank was coming back and looked well on the way to sustainable dividends. And now, the RBS share price has also been suffering.
Bank dividends stopped
These fears are now history, as both banks have been forced to halt their dividend payments by an intervention from the Prudential Regulation Authority (PRA). That’s obviously going to be a bit of a blow to those relying on dividend income, and it’s not great news for pension funds.
But, as a shareholder, I might sound like I’m losing my marbles when I say I welcome the move. Even if the Lloyds share price has suffered.
The long-term viability of Lloyds and RBS is far more important than this year’s dividend, or the current Lloyds and RBS share prices. Preserving capital is key to that, and I see the PRA’s intervention as quite handy. The boards of the two banks don’t have to make the painful decisions themselves, and in a ‘Sorry folks, we had no option’ situation, shareholders will be less likely to see them as failing.
More important than bank shares
I also see some priorities as way more important than the interests of shareholders. UK plc needs to remain solvent, and banks need to do their bit to help. I reckon putting the country first right now will work to the banks’ long-term interests, but the short-term nature of markets could be a significant force against that without the PRA’s approach.
We can see how the markets don’t like it by looking at the Lloyds and RBS share prices. The Lloyds share price has crashed by around 50% from the start of the crisis (depending on when you take the start). Similarly, the RBS share price has fallen by just about the same amount. That’s twice the fall of the FTSE 100, which is down 25% and appears surprisingly stable at around 5,500 points.
Buy or sell Lloyds shares?
So what should we do, fill our boots or run for the hills? I’ve often made mistakes by not selling shares when I really should, but I’ll tell you one thing. I’m not selling my Lloyds shares for 29p. It’s not because I’d crystallise a significant loss — that’s a poor reason for not selling. No, its because I only want to sell shares if they’re overvalued or if I need the cash. Right now I’m in a net investing phase and I don’t need the cash. And I absolutely don’t see 29p as an overvaluation.
The Lloyds share price puts it on a trailing P/E of around eight, and I see that as a valuation to buy at. And the RBS share price indicates a trailing P/E of only four, which looks to me like it’s priced for the bank to go bust. I really can’t see RBS going bust.
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Alan Oscroft owns shares of Lloyds Banking Group. 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.