If you’re already an investor in Lloyds shares, there might not be a lot I could say to change your mind about the share. But I’m going to try anyway.
Lloyds regularly takes the number one spot as the FTSE 100’s most frequently traded share. Over 300 million shares change hands on average every month.
Part of this is down to the psychology of share pricing. To novice investors, shares that cost 30p each seem more of a bargain than those that cost £50 each. The other part of the equation is that the high street bank is trading near its all-time low.
Failing Lloyds falls
The Lloyds share price is down 5% since last week. Down 10% in a month. 50% lower than it was six months ago. We’re not quite at the lowest price in the last decade — 22.3p per share in November 2011 — but we’re close.
Dividends used to numb the pain of a share price that never seemed to go up. And Lloyds used to beat the average yield of the FTSE 100. It paid shareholders 6.2% in 2018, up from 4.5% the year before.
But one of the chief reasons why so many people invest in the Lloyds share price has just been snatched away. On 1 April — sadly no joke — the bank bowed to regulatory pressure and scrapped its 2020 dividends and share buybacks.
Lloyds has deserted its dividend income seekers, and they have abandoned the stock in return. That means more downward pressure on the share price as buyers head elsewhere for long-term returns.
CEO António Horta-Osório had to set aside £2.5bn in 2019 to pay for customer compensation for the PPI mis-selling scandal. That dropped pre-tax profits by 26%. Looking ahead, we are going into what will likely be a deep and sustained UK recession.
So what could go right for Lloyds?
The experts could be wrong. The coronavirus crash might not force the UK to contract by 35% this year, as the independent Office for Budget Responsibility predicts.
We could find a vaccine for the disease in record time, allowing economies to open sooner.
The Lloyds share price is closely linked to the performance of the UK economy. When things are going well, the black horse gallops faster. When things look bleak, it gets turned into glue.
In the short term, the UK chancellor Rishi Sunak could bow to pressure from the business community. If he beefed up support for coronavirus business rescue loans from 80% to 100%, this would mean lower-risk loans for Lloyds.
The risk of significant credit losses, even with just 20% cover, means commercial lenders like Lloyds are still turning down borrowing requests that could stop thousands of SMEs going bust.
Why does this matter so much?
£10,000 of your hard-earned cash invested in Lloyds five years ago would give you around 12,698 shares. Today, those same shares would be worth £3,810. Not including dividends, you’d be sitting on a £6,000 loss.
As long-term investors we are constantly seeking a place for our capital that will provide the best-possible return. Our money is not infinite. We pay an opportunity cost every time we make an investment decision.
Simply put, the money we deploy into one stock cannot at the same time be put into a second investment option. And there are so many better places for your money in FTSE 100 dividend payers.
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Tom Rodgers has no position in 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.