Just imagine if supermarkets were like stock markets. Instead of strolling into your local Tesco with a trolley and loading up on your weekly essentials, you’d have a trading website that showed the current prices, accurate to the minute, of all the supermarket products. So you’d check the prices of BRC (broccoli), YOG (yoghurt) and CAKE (cake, obviously).
Your alerts would tell you that Sauvignon Blanc is currently half price, and you could pile into buy-one-get-one-free on bourbon biscuits.
Stock markets are no different to supermarkets
Sounds like a crazy idea? Well it is. But if you think about it, stock market trading isn’t all that different. If you were at your local supermarket, you’d buy goods only when they were cheap, and would avoid the pricey items.
It’s the same with investing. You’d stock up on shares when they were cheap. And that’s why there’s never been a better time to buy Lloyds Banking Group (LLOY) and Barclays (LSE: BARC). Investors should take advantage of the recent share price pullback to stock up on these banking stalwarts.
Lloyds has fallen from a high of 89p last year to just 64p. Barclays has fallen from a high of 289p last year to 191p. These 25%-plus falls must be difficult to take for anyone who is already a shareholder. But I think it has opened up a buying opportunity.
Let’s take Lloyds. The 2015 P/E is estimated to be 8.47, with a dividend yield of 3.42%. Now analysts have always tended to be over-optimistic about this firm’s profitability, but I still think Lloyds is cheap.
The numbers are similar for Barclays. The 2015 P/E is predicted to be 8.77, with a dividend yield of 3.39%. Again this looks good value.
Promising signs
The rider with the banks has always been that the actual profit has often been nowhere near the forecast profit, due to fines, PPI litigation and bad debts. And with no interest rate rise on the horizon, there won’t be a sudden jump in underlying profitability any time soon.
However, there are some promising signs. The level of fines and of litigation seems to be gradually tailing off. The bad debts accumulated in the years since the Credit Crunch are largely cleared. The age of banker-bashing seems finally to be at an end.
The banks are set to recover steadily, but the era of hyper-profitable banks is long gone. Why? The legacy of the Great Recession, a future where low inflation and low interest rates are the norm, and the fact that tech plays an ever more important part in financial transactions.
That’s why I see the banks as slow-growing-but-steadily-improving dividend stocks that you squirrel away and forget about until your retirement.