When I bought shares in Lloyds Banking Group (LSE: LLOY) in September 2015, it was with a long-term plan and my intent was to ignore short-term price movements.
But when you hold a share that you’re convinced is one of the biggest bargains you’ve seen in years, and its price stubbornly remains low year after year, it must surely make you question your choices, mustn’t it?
Another bad year
It was a bad year for Lloyds shares in 2018. But when the price started perking up in 2019, I started to wonder (yet again) if this year might be the year it started to come good. But it’s been another of those familiar false starts and the shares are slipping again.
I need to re-examine my investment, especially now that I’ve endured a 24% share price fall since purchase. I tend to stick by a rule of investing for a minimum of five years in any one stock, but I’m not far off four years already, so what should I do now?
That largely depends on the answers to two questions: Was my analysis wrong when I bought? How do Lloyds shares look now?
Solid performance
To answer the first question, being as bearish as I can, I still don’t think I got it wrong. Since Lloyds pulled itself back from the depths of the financial crisis, it’s been growing its earnings per share steadily. The dividends have been accumulating nicely too, and that has provided me with some compensation for my share price loss.
Growth in the first quarter this year was modest, mind, and there must be fears that we’re in for a flat period (at least) for Lloyds in terms of revenue and profits.
And although the the dividends are covered around 1.7 times by earnings, which I see as safe enough in healthy times, an economic recession could easily result in another squeeze on banking profits and on the dividend (along with the rest of the sector). The annual cash is by no means assured.
Brexit
A disorderly Brexit could result in a serious economic decline, with estimates of a shrinkage varying from 6% to 9%. And as Boris Johnson has taken the lead in the Tory leadership stakes, the markets appear to be seeing the chance of a no-deal departure growing. At least the fall in the pound would appear to suggest that.
So that’s the gloom. But Lloyds doesn’t seem to think it has any liquidity problems, as it continues to hand back excess capital to shareholders by way of its ongoing share buyback.
On top of that, the long-running PPI saga will conclude soon, with the deadline for claims being 29 August. That will bring to an end the bank’s annual compensation payments.
My verdict
On balance, with Lloyds shares on P/E multiples of around eight and the dividend forecast to yield around 6% this year, I still think the shares are oversold, despite Brexit fears.
Saying that, I think it could take another five years for the Lloyds share price to come good. But my horizon is at least as long as that and, for me, Lloyds is still a firm hold — and a possible top-up buy.