In 2013, Lloyds Banking Group (LSE: LLOY) posted pre-tax profits of £415m. This year, City analysts following the firm expect Lloyds to earn around £7.5bn.
Many other trading firms would have rewarded investors handsomely with such a profit turnaround, but an investor buying shares in Lloyds on 1 December 2013 and holding until 1 June 2016 will have lost money.
In fact, buying shares on 1 December 2013 or at six monthly intervals thereafter would have delivered a negative result on total returns. Why is Lloyds such a dog of an investment?
It hasn’t all been bad
Although Lloyds made a poor investment for the past two-and-a-half years, investors made big gains immediately before that, which suggests that timing an investment in a cyclical firm such as Lloyds is more important than with other companies.
What catches many out is that the usual methods we use to time investments — such as seeking a low valuation — don’t really work with cyclical firms such as banks. Right now, Lloyds looks cheap on conventional valuation indicators but I think we should be cautious because cyclicals can be at their most dangerous for investors after a period of high profits and when the valuation looks low.
This is how you would have fared with Lloyds if you’d bought the firm’s shares at six monthly intervals from 1 June 2012 and held your purchase until 1 June 2016. I’ve ignored trading costs for this example:
|
Purchase date |
Buy price |
Price on 1/6/16 |
Share price gain/loss |
Dividends |
Total return in pence per share |
Total return in percentage |
|
1/6/2012 |
26p |
71p |
45p |
3.5p |
48.5p |
187% |
|
1/12/2012 |
46p |
71p |
25p |
3.5p |
28.5p |
62% |
|
1/6/2013 |
62p |
71p |
9p |
3.5p |
12.5p |
20% |
|
1/12/2013 |
79p |
71p |
(8p) |
3.5p |
(4.5p) |
(5.7%) |
|
1/6/2014 |
77p |
71p |
(6p) |
3.5p |
(2.5p) |
(3.2%) |
|
1/12/2014 |
80p |
71p |
(9p) |
3.5p |
(5.5p) |
(6.9%) |
|
1/6/2015 |
89p |
71p |
(18p) |
2.75p |
(15.25p) |
(21%) |
|
1/12/2015 |
74p |
71p |
(3p) |
2p |
(1p) |
(1.4%) |
The table shows spectacular returns for Lloyds’ investors catching the share price lows of 2012. But to invest back then you would have needed to look at Lloyds in a different way from most other non-cyclical investments. Lloyds posted a pre-tax loss of £3.5bn in 2011 and further losses of £606m in 2012. Faced with figures like that, your value investor’s toolkit would have let you down and probably kept you out of Lloyds.
It’s true that the discount to net asset value that the Lloyds share price offered back then might have tempted you, but on the potential for earnings and cash flow recovery, you would have had to take a leap of faith. Many are glad they did. As we see in the table, catching the up-leg with a cyclical share can deliver pleasing results fast. An investment in Lloyds made from December 2013 onwards, though, would have delivered a loss.
Risks ahead
Looking forward, at earnings levels like these today, Lloyds could deliver lacklustre returns at best for investors but now comes with the ever-present danger of potential for profit and share price reversals. Earnings look ‘peaky’ to me, and the stock market has every incentive to mark down Lloyds’ valuation progressively in an attempt to anticipate and discount the next cyclical downturn. Such compression in valuation could drag on investor total returns from here. However, even that seems unlikely to succeed in stopping a further collapse in the share price down the road.