Today I’m looking at why you should — and shouldn’t — splash the cash on Lloyds Banking Group (LSE: LLOY).
Brexit bothers
I’ve been bullish over Lloyds’ share price prospects for some years now. Well, right up until the point Britain decided to jettison itself from the EU back in June.
Sure, the bank’s reliance on the UK retail banking segment may not have made it the ‘sexiest’ stock selection. But Lloyds’ absence from emerging markets, not to mention the unpredictable investment banking segment, made it a reliable pick for growth hunters.
However, the strong prospect of stalling revenues and rising bad loans as the country prepares itself for and adjusts to Brexit has caused me to revisit my bullish take on the firm.
Today the OECD modestly upgraded its 2016 GDP forecasts, to 1.8%, as the instant impact of June’s vote has been less profound than first feared. But the body expects the result of the referendum — allied with wider macroeconomic troubles — to hit the economy with gusto in the longer term, and the OECD slashed its 2017 growth estimates to 1% from 2% previously.
Costs collapsing
Optimists will quite rightly suggest that Lloyds’ ongoing cost-cutting scheme will take some of the sting out of a possible economic slowdown, however.
The company’s Simplification scheme has worked wonders in building the firm’s capital base, hiving off non-core assets and cutting costs across the business. And the ‘Black Horse’ is far from done yet — Lloyds hiked its run-rate savings target to £1.4bn from £1bn by the close of 2017 back in July, the bank identifying an extra 200 branch closures during the period.
A cheap paper pick
Besides, it could be argued that the heightened risks since June’s referendum are currently baked into Lloyds’ weaker share price.
While the firm is expected to suffer a 14% earnings slump in both 2016 and 2017, these figures leave the financial giant dealing on P/E ratings of just 7.9 times and 8.9 times. This is comfortably below the benchmark of 10 times indicative of stocks with patchy earnings outlooks, and certainly trumps the readings of many of its rivals like Barclays and Royal Bank of Scotland.
Dodgy dividends?
Many investors would also point to Lloyds’ market-beating dividend yields as reasons to invest.
The City expects the business to hike last year’s 2.25p per share dividend to 3.2p and 3.4p in 2016 and 2017 respectively, and they’re projections that yield a handsome 5.5% and 5.9%.
But the likelihood of worsening economic conditions in the months and years ahead, combined with a further rise in PPI-related bills, could see Lloyds struggle to meet these heady forecasts.
I certainly share this view, and reckon there are far more appetising stocks out there for both growth hunters and income chasers.