Stock market crash: 3 reasons why I won’t buy into the Lloyds share price in an ISA

Looking to get rich with UK shares? Royston Wild explains why buying into the Lloyds share price is a bad idea after the stock market crash.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Our view here at The Motley Fool couldn’t be clearer. Share investors shouldn’t be discouraged from building their stocks portfolios after the stock market crash. Instead, they should embrace the opportunity to buy some top-quality UK shares at rock-bottom prices.

Of course, investors need to be careful when it comes to buying on the dip. Sure, plenty of great UK shares have been unfairly washed out along with the bad. But some well-known British blue-chips now carry low valuations because of their colossal risk profiles. Many can be considered bona-fide investment traps, even at current prices.

Image of person checking their shares portfolio on mobile phone and computer

A look at the Lloyds share price

Take Lloyds Banking Group (LSE: LLOY) as an example. The FTSE 100 banking goliath has more than halved in value since the beginning of 2020 as earnings look on course to collapse. Brokers predict that annual profits will sink 64% this year.

The bank has its fans though, and some investors believe it’s a great value buy ahead of a profits recovery in 2021. City forecasters reckon the bottom line will swell more than 200% next year as the Covid-19 economic hangover lessens. This leaves Lloyds dealing on a forward price-to-earnings (P/E) ratio below the bargain-basement level of 10 times.

In addition, broker suggestions reckon Lloyds will become an attractive dividend option for investors in UK shares again in 2021. They predict that the bank will pay a 1.9p per share reward. And this creates a bulky 6.5% dividend yield.

Risks ahead

The Lloyds share price is cheap then. But it’s cheap for a reason. Well, several very good reasons, in my opinion, which include, but aren’t exclusive to:

  • The UK economic downturn becoming more severe than initially expected. A great many experts have been caught out by the scale of the financial consequences of Covid-19. Esteemed forecaster EY Club has just increased its predictions for the second quarter economic slump to 20%. This is up 5% from just a few weeks ago. And it’s not the only expert to slash its estimates. Hopes that Lloyds’s profits will rebound strongly next year look more than a little shaky, in my opinion.
  • Lloyds’ lack of overseas exposure. The International Monetary fund says UK economic growth will be the second-worst in 2021 across all advanced economies, behind only Japan. This means that Lloyds’ revenues could lag behind those with foreign operations, such as Barclays and HSBC, next year and possibly beyond too.
  • The decision to cut dividends has been a major reason why the Lloyds share price has plummeted in 2020. Britain’s banks acted on instruction from the Bank of England at the height of the Covid-19 crisis. And speculation is growing that Threadneedle Street might stop the likes of Lloyds restarting their dividend policies from 2021. That 6.5% dividend yield also looks like it’s standing on thin ice too.

Buy better UK shares

So why take a gamble on the Lloyds share price when there’s many other quality stocks to buy at low prices. The stock market crash provides plenty of great stock buying opportunities today. But buying Lloyds isn’t one of them.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »