The long-suffering shareholders of Lloyds Banking Group (LSE: LLOY) must be dreading 2021. At end-2020, the Lloyds share price closed at 37.01p. That represented a collapse of more than two-fifths (40.8%) from 62.5p at the end of 2019. But 2021 has already got off to a rocky start for Lloyds.
The Lloyds share price is down
As I said, the Lloyds share price has already had a pretty rough start to 2021. As I write, the shares trade at 32.88p, down a ninth (11.2%) so far in January. That’s a fall of almost a fifth (19.5%) from the November high of 40.82p. Just as things were perhaps starting to look up for Lloyds, its share price takes a beating over two months.
Then again, the Black Horse bank has been disappointing shareholders for a long time. Its share price has almost halved (down 48.8%) over the past half-decade. Even so, the Covid-19 crisis has driven down the shares to the point where they look like a real bargain to me. I could be wrong, but I’m hopeful for a brighter future for Lloyds.
Three reasons I’m optimistic
I’m no Pollyanna, but I believe I can see light at the end of the tunnel for the UK and, by extension, the Lloyds share price. First, with Covid-19 vaccines being rolled out and lockdowns in force, infections and deaths should begin to decline. As we get the pandemic under control, lockdown restrictions will ease and consumer spending could take off. This could lead to a rapid recovery for the economy in the second half of 2021.
Second, as the economy rebounds from this double-dip recession, company revenues and profits should improve. This would mean Lloyds needing to set aside lower reserves to meet loan losses and bad debts. Again, this should be positive for the Lloyds share price.
Third, the banking regulator forced banks to cancel their cash dividends in early 2020. Recently, it gave its blessing for these to resume this year. News of the return of the Lloyds dividend could come as early as February. When it does, this could lift the Lloyds share price as income investors return and buy.
Then again, if the Covid-19 crisis worsens and virulent new variants keep emerging, then this could do untold harm to companies and consumers. In this scenario, company earnings could fall, job losses could soar, and Lloyds could be hit hard. I can’t ignore this possibility, but it might be alleviated by more government support for business.
In summary, I know it’s been a really tough time being a Lloyds shareholder since the June 2016 Brexit vote. And that the Lloyds share price has taken a brutal beating over the past 12 months. But I’m hopeful that this losing streak will eventually end. Obviously, I could be wrong, but the best time to buy shares in decent businesses is when they are low, not when they are sky-high. Right now, I think the Lloyds share price offers a positive skew of reward versus risk. Indeed, for the shares to hit a nice, round 50p would only take a rise of just over half (52%) from the current level. With a following wind, I think this might be possible in 2021 or the first half of 2022. We’ll see!
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.