I want to be clear up front that I own shares in Lloyds Banking Group (LSE: LLOY) and that this is very much a personal opinion. I bought some because I thought they were far too cheap for what is probably the UK’s best retail bank, and I still think that.
After all, with the shares priced at 65.6p, we’re looking at a forward P/E for 2017 of 9.7, which is a lot cheaper than Barclays and Royal Bank of Scotland. That’s down to predicted earnings falls, but Lloyds’ dividends are still rising strongly and are forecast to reach 6% by 2018.
Whence a re-rating?
Lloyds is set to deliver full-year results on 22 February, and I’ll be looking for two things that could sway investor sentiment. EPS is expected to fall by about 17%, and at this late stage that’s likely to be close to the mark. But any signs of strengthening late in the year would be welcome, as would any improvements in guidance for this year and for 2018.
News of dividends should also be crucial. Analysts are expecting a 27% uplift for 2016, followed by a further 22% this year and then 14% next. And who doesn’t want that? Well, with falling earnings, cover would amount to only around 1.6 times by 2018, and that must raise doubts in some minds about the sustainability of the payments — so something on the bank’s progressive dividend policy wouldn’t go amiss.
Dividend forecasts have actually been cut back a little in recent months, with a 2017 consensus of 3.66p per share three months ago dropping to 3.47p today. Not a big fall, but it will surely shake confidence a little, and we might need to see that prediction stabilising (or better, rising again) before people start buying.
On the bright side, EPS forecasts for 2017 and 2018 have actually been steadily growing — the 6.82p forecast for this year has risen from 6.54p six months ago. That’s an attractive trend, but I think a pivotal moment should come when we see earnings growth definitely back on the cards rather than just the decline slowing.
The elephant in the room
The big issue is Brexit, and the uncertainty that spells for the economy and for the banking sector. The referendum vote crunched Lloyds’ shares, and they still haven’t recovered the loss, though they’re creeping slowly back up again.
Now, I think Lloyds has a strong future with the UK outside of the EU. The most recent banking stress tests showed that Lloyds is in a stronger position than most, after years of asset disposals and a refocus on the bank’s UK retail operations. And in that local market, Bank of England stimulus is almost sure to continue right through the Brexit years, and we’re seeing increasing government impetus to stimulate mortgage lending while simultaneously boosting the UK’s housing supply.
So we’re likely to see two or three years of uncertainty as we pick out our path to EU separation, but once our exit terms regarding banking are clear, I reckon we’ll see an uprating of the sector.
Of course, I could be wrong, and any weakness in EPS forecasts or dividends could send the shares in the opposite direction. And my colleague Ian Pierce has seen a few things he doesn’t like — so be sure to read all opinions before making up your own mind.