I’ll be upfront here — I hold Lloyds Banking Group (LSE: LLOY) shares, and I’m getting increasingly frustrated by their stubborn refusal to budge from what I see as too low a valuation.
In fact, with forecasts suggesting a P/E of a little over seven, which is only around half the FTSE 100’s long-term average, I could see 100p as still being a price to buy at. And I think that’s especially true, considering the high dividends we’ll be getting if forecasts prove accurate — analysts are predicting yields of 5.8% this year and 6.3% next.
So what is it that’s led the Lloyds share price to lose 15% so far in 2018? Thursday’s third-quarter update doesn’t appear to shed much light on that puzzle.
Better than expected
If anyone thought expectations were running too high, Lloyds actually beat them with a pre-tax profit of £1.8bn for the quarter, after total income edged up 1% to £4.7bn. Though that profit figure was 7% down on the same period last year, due to expected one-off costs, it was ahead of estimates of £1.7bn.
The figures were helped by stable net interest margins and falling costs, as chief executive António Horta-Osório stressed the bank’s “low risk, customer-focused approach.”
Horta-Osório went on to say: “We remain on track to deliver the improved financial targets for 2018 that we announced in August, as well as all of our longer term guidance.”
It’s surely the elephant in the room, Brexit, that’s sending people running scared from banking shares in general, and from Lloyds in particular.
UK focus
Chief financial officer George Culmer (who, incidentally, revealed that he’s set to retire next year) pointed out to reporters that 97% of the bank’s business is UK-focused, and expressed confidence in some sort of Brexit withdrawal agreement being reached.
The Bank of England fears that lending could dry up should a no-agreement Brexit happen, though Reuters has reported that the BoE has contingency plans intended to prevent that happening.
Although it’s certainly one of the fears, perhaps the biggest one, keeping the Lloyds share price down I see it as overblown. Lloyds surely won’t want to pull back from the impressive turnaround it has achieved under Culmer’s financial stewardship — for which I, as a shareholder, thank him.
There’s the PPI thing too, and that uncertainty is going to be hanging round shareholders’ necks until the sorry episode is finally put to bed. The claims deadline is 29 August 2019, but many are fearing a last-minute rush that could send the final compensation total even higher.
To 2019
A year from now, PPI will be done and dusted. But more importantly, we should have been out of the EU for more than six months and we’ll know how the UK banking business is doing. And in my view, it will be doing just fine.
So what should we do? Nothing, I say. I’m just going to remain patient with my multi-year horizon and keep taking the dividends. Dividends from Lloyds have already helped buy me a small stake in Sirius Minerals, and I’m wondering what to go for next as the cash builds up again.