It’s been an exhausting and frustrating journey for holders of Lloyds Banking Group (LSE: LLOY) shares over the past few years.
Those buying the stock to benefit from a hoped-for long recovery period after the credit crunch and great recession have been largely disappointed. And now, to cap it all, the bank has axed its dividends in the wake of the coronavirus pandemic.
The problems with Lloyds shares
I admit it’s not Lloyds’ fault. The entire banking industry in the UK came under pressure from regulators to cancel dividend payments for the remainder of 2020. And that adds up to around £13.5bn snatched from income-seeking investors across the whole sector.
However, dividends aren’t the only problem with Lloyds’ shares. The underlying banking business is as cyclical as businesses get. It’s no surprise that the stock was one of the biggest plungers in the spring stock market crash.
But if you are into cyclical investing, there’s a good case for the shares being a decent buy now. Indeed, the price-to-book rating is below 0.5. Earnings have slumped this year after a long period of annual rises. The share price is on the floor. And the dividend is toast. Theoretically, there isn’t a better time to buy the stock than right now.
But have you the stomach for it? I haven’t. Rather than thinking of a dark horse, I view Lloyds as a dog when it comes to its investment potential. Sure, it could lead the market higher in the next stock market bull run. After all, bank shares are ‘supposed’ to be among the first into and the first out of recessions. But a cyclical stock like Lloyds would only ever be a relatively short-term trade for me, to catch the next up-leg.
But Lloyds’ credentials as a serial-disappointer remain strong. I’d rather ditch the stock completely and look for dividend survivors of this crisis. When I find them, I’m likely to invest for the long haul and allow the process of compounding to build my investment over time. One decent candidate is pharmaceutical giant GlaxoSmithKline (LSE: GSK).
Why I think value is building
The company hasn’t raised its dividend for a long time, but it hasn’t cut it either. Meanwhile, revenue earnings and cash flow have been generally drifting upwards for years, albeit slowly. And the pharmaceutical sector is known for its defensive qualities. Indeed, medicine consumption tends to be a steady thing uncorrelated to the ups and downs of the economy.
To me, GlaxoSmithKline looks like it’s well placed to keep on churning out those shareholder dividends for decades to come. Recent restructuring plans and a steady stream of positive announcements keep me optimistic about the future of the business. The dividend may be flat, but I think value is building in the business.
With the share price near 1,575p, the forward-looking dividend yield for next year sits just above 5%. And the earnings multiple is a modest-looking 13 or so that year. I’d buy the stock right now.