I wrote my most recent bearish article on Lloyds Banking Group (LSE: LLOY) on 8 March. It wasn’t unusual because I’ve been writing nothing but negative pieces about the stock for years. But some quite significant things have changed since early March.
The plunging Lloyds share price
Back then, the stock was at 45p. Today it’s around 30p, as I write. And that further plunge of more than 30% makes quite a difference. In March, the share price was already more than 30% lower than at the start of the year. Now, the drop since early January is more than 50%. If you’re looking to buy shares in Lloyds, I’d say that move is encouraging.
And there was further news from the firm on 1 April. Lloyds’ directors said in the update they’d decided to stop shareholder dividend payments and share buy-backs. That came after the Prudential Regulation Authority (PRA) encouraged banks to preserve capital because of the coronavirus pandemic.
So, there’ll be no final dividend for 2019 and no quarterly or interim dividends in 2020. We’ll have to wait until the end of this year before the directors will “decide on any dividend policy and amounts.” And I read that statement as meaning there’s no certainty dividends will start up again then.
Indeed, the recession following the coronavirus lockdown could be grim. And we may see the absence of dividends from Lloyds for some considerable time because of it. But as a potential new shareholder of Lloyds’ shares, I welcome the news dividends have been suspended.
Of course, the news is dire for existing shareholders who’ve now experienced the double whammy of a collapsing share price and the halting of dividend payments. So why do I see the cutting of the dividend as a positive indicator?
How I’d aim to make an investment work
I don’t view Lloyds as a growth or income investment. To me, it’s a cyclical stock. I reckon the banking sector is one of the most cyclical sectors out there. And that’s why the Lloyds share price is responding so much to the current crisis.
For many years, its share price has been swinging up and down a lot and moving essentially sideways. That may seem perplexing because earnings have been improving for much of the time and the dividend has been rising incrementally. Indeed, many observers have made much about the mouth-watering value indicators Lloyds has been displaying, such as a high dividend yield and low price-to-asset values.
But the valuation is ‘supposed’ to look low as earnings rise. The market ‘knows’ cyclical troughs follow peaks. And the only way it could compensate for the risk ahead was by nibbling the valuation lower. And that’s why, for years, I’ve been commenting about the risk to the downside.
To me, valuation indicators work back to front with out-and-out cyclical stocks such as Lloyds. So the stock looks more attractive to me now the share price is near its previous lows and the dividends have stopped for the time being.
I’m not yet a full-on bull about Lloyds, but I’m starting to watch it closely!
Kevin Godbold has no position in any share 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.