It seems that every time you open a newspaper, things get dicier for Lloyds Banking Group (LSE: LLOY). News that lockdown measures are being gradually unwound in the UK is good news, of course. But this is more than outweighed by other bad omens for the FTSE 100 bank.
Last week the Bank of England announced that Britain faces the sort of economic meltdown not seen for more than three centuries. Expect the number of bad loans on Lloyds’ books to explode.
The Old Lady of Threadneedle Street then said that a subsequent house market crash could send property values tumbling by as much as 16% this year. Lloyds is, of course, the country’s largest mortgage lender and this threatens to add extra strain to the top line.
More bad news
To complete the triumvirate of bad news, one of the Bank of England’s chief economists has popped up to say that interest rates may fall further from record lows of 0.1%. According to Ben Broadbent on Tuesday, “it is quite possible that more monetary easing will be needed over time.” The deputy governor even suggested that negative interest rates could come under consideration.
The outlook for Lloyds is bad and it’s getting worse. This explains why City brokers have been scything down their profits projections for 2020. The FTSE 100 bank is currently expected to endure an eye-watering 40% reversal in annual profits this year.
I fear that any sort of meaningful rebound in 2021 could prove evasive too. It’s not just the prospect of fresh lockdowns during this fluid coronavirus crisis, and/or the possibility of a second outbreak later this year that clouds Lloyds horizon. This is just speculation at this point. What is not is that the era of low, profits-crushing interest rates is certain to continue during this new decade.
You can therefore forget about the Footsie firm’s ability to resurrect its recently-axed generous dividend policy next year as well. At current prices, Lloyds carries an undemanding forward price-to-earnings (P/E) ratio of 14 times. This isn’t anywhere near enough to encourage me to invest.
A 5%-yielding Footsie stock
This non-cyclical stock is boring during the good times but an absolute hero in tough economic times like these. It goes one better than the likes of Centrica, another FTSE 100 company that fulfils the essential role of electricity provision. National Grid has a monopoly on operating the UK’s power grid and that protects it from the profits pressure that the British Gas owner has to endure.
What’s more, unlike Lloyds, National Grid’s earnings and dividend outlook actually benefits from the additional loosening of Bank of England monetary policy. Lower rates cut the cost of servicing its debt pile, giving it greater flexibility to keep doling out meaty dividends.
City analysts expect the Footsie giant to lift the yearly dividend again in the current fiscal year to March 2021. This is supported by an expected 1% profits rise and creates a mighty 5.3% dividend yield too. I’d happily buy National Grid, my enthusiasm boosted by its undemanding forward P/E ratio of 15 times.
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.