The shareholders of Lloyds Banking Group (LSE: LLOY) must be fed up. Over the past few years, the stock has been a serial disappointer.
Apart from a brief period of excitement in 2009 when the share shot up from its credit-crunch lows, it’s travelled essentially sideways. And now, at around 30p, Lloyds is back near where it was in those dark days following the financial crisis of the noughties.
Lloyds Bank has underperformed
A long and sustainable recovery didn’t materialise. Instead, time after time, Lloyds has demonstrated its vulnerability to the cyclical winds that buffet the stock market and economies.
And what now? As we face potentially the biggest economic slump in around 300 years, is it wise to place our faith and money in the shares of Lloyds? I wouldn’t. We’ve had ample experience of the stock’s tendency to underperform in relatively benign conditions. As things get more serious in the economy, I’d rather be elsewhere.
Luckily there are many opportunities in the stock market. And resilient businesses back a lot of shares in a way that’s strikingly different from the anaemic operations behind Lloyds. One great example is Treatt (LSE: TET), which manufactures ingredients for the flavour, fragrance and consumer goods markets.
Treatt plunged because of the coronavirus crisis. But a big difference between Lloyds and Treatt is the smaller company’s bounce-back over recent weeks. Indeed, with the share price close to 499p, it’s now just 8% lower than immediately before the crisis broke.
Strength in the underlying business
And the reason for the strength in the share price is the resilience of the underlying business. In today’s half-year results report, the company said: “Covid-19 has had no adverse impact on trading performance to date.”
Chief executive Daemmon Reeve explained some weakness in the citrus raw material markets affected the first-half figures, but H2 “is likely to witness an improvement in this category.” But higher-margin tea, health & wellness and fruit & vegetable categories are driving growth.
Today’s figures show revenue and profits down by single-digit percentages compared to the equivalent period the prior year. But the directors slapped just over 8% on the interim dividend, continuing a long record of dividend progress. This is a very different story from the dividend axing we’ve seen with many other companies during this crisis.
Looking ahead, Reeve reckons it’s difficult to forecast the likely impact of the coronavirus on demand for the firm’s products. He concedes there may be a slowdown in some customers’ new product development activities in the short term. But he’s “encouraged” by the level of the order book and the current demand for “beverage ingredients through to solutions for hand soaps and cleaning products.”
The balance sheet looks robust, with a net cash position. And trading seems steady. Although the forward-looking earnings multiple runs just below a full-looking 25 for the current trading year, I reckon Treatt has earned its rating. And with the prospect of further gentle growth ahead, I’d much rather be holding the firm’s shares in my quest to get rich and retire early than I would those of Lloyds.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group and Treatt. 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.