Are you building a list of top UK shares to buy in 2021? It’s possible that Lloyds Banking Group (LSE: LLOY) could be on your radar today. But it’s not a FTSE 100 stock I’ll be buying for my own Stocks and Shares ISA.
At face value, Lloyds might appear to be too good to miss at current prices. City brokers expect annual earnings to rocket 133% in 2021. This leaves the bank trading on a low forward price-to-earnings (P/E) ratio of 11 times. Predictions that Lloyds will turbocharge dividends as a result means this UK share sports an enormous 4.4% dividend yield too.
These are all hugely attractive numbers. But they are figures that are in huge danger of being chopped down very soon. Allow me to explain why.
Lloyds bonuses get bashed
I’ve been cautious over Lloyds’ profits outlook for a long time now. My hackles were raised again just before Christmas when the FTSE 100 bank announced it was scrapping all staff bonuses. It’s no surprise that its share price dropped when Lloyds’ people and property director Matt Sinnott declared that, “while we have returned to profit, we are not where we expected to be and are short of the commitments we made to ourselves and our shareholders.”
This battered UK share returned to profit in the third quarter of 2020. However, pre-tax profit for the period was still down 76% year on year. Lloyds faces a hell of struggle to get earnings moving in the right direction. The worsening Covid-19 crisis and huge Brexit disruption both threaten to hamper the domestic economy, and with it the performance of this most cyclical of stocks.
Indeed, a spike in coronavirus infection rates and the introduction of strict new lockdowns is prompting a scramble among City brokers to downgrade their GDP estimates for the new year. It stands to reason that UK shares with a high gearing to the British economy (like Lloyds) will see their earnings forecasts slashed.
Today was the turn of the Resolution Foundation to sound the alarm. The think tank reckons new Covid-19 lockdowns could cause the UK economy to be 6% smaller by Easter than the Office for Budget Responsibility predicted last month. It also predicts that growth for the full year will come in at 4.3%, lower than the 5.5% that the OBR estimated in November.
Buying other UK shares instead
The risks to Lloyds and its peers stretch long beyond 2021 too. And it’s not just because the direct impact of Covid-19 and Brexit could persist for many years to come. It’s that low Bank of England rates will remain in effect for much, much longer, keeping margins at UK banking shares like this one under severe pressure.
So why take a risk with Lloyds? I certainly won’t be buying this FTSE 100 share for my ISA any time soon. There are plenty of other cheap UK shares that are in much better shape to thrive in 2021. And The Motley Fool can help you dig these out with its huge library of free and exclusive reports.
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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.