If Santa Claus had bought Lloyds Banking Group (LSE: LLOY) shares a year ago, just before Christmas 2019, would he be feeling naughty or nice today? I think he’d be feeling pretty naughty. And also fed up, like millions of other shareholders who watched the Lloyds share price plummet in 2020!
Long-lasting losses for the Lloyds share price
The Lloyds share price has been one of the FTSE 100‘s biggest losers in 2020. That’s hardly surprising, given that it’s the UK’s biggest retail bank with 30 million customers, caught in the crossfire of the Covid-19 crisis. Being a leading lender during the UK’s worst economic contraction in over 300 years has hobbled the Black Horse bank this year.
At the current 32.99p, the Lloyds share price has crashed by almost half (47.1%) over the past 12 months. It’s also been hit hard today, down 1.91p (5.5%) on fears of a fast-spreading Covid-19 variant. Even worse, Lloyds shares have been serial disappointers for years: down 32.8% over two years, 47.7% over three, and 51.1% over half a decade. But here’s why I’m expecting a comeback in 2021.
1. This stock is temporarily depressed, not dead
At their 52-week high, Lloyds shares peaked at
Three months ago, I said this stock was crazily cheap. Today, I am only slightly less optimistic with the Lloyds share price hovering just below 33p. This depressed level values a leading UK bank — built up since 1695 — at just £24.7bn. If I could buy the whole of Lloyds at the current valuation and pocket all of its profits forever, I would greedily snap it up today.
2. Lloyds’ rebound will pay dividends
The long spring lockdown forced Lloyds to set aside billions of pounds to cover potential loan losses. Happily, the worst-case scenario didn’t emerge, thanks to enormous government support for workers and businesses. As a result, Lloyds bounced back in the third quarter, reporting a £1bn pre-tax profit. Also, being a ‘boring’ UK-only bank means Lloyds has a rock-solid balance sheet, stuffed with low-risk, ‘safe as houses’ mortgages. Furthermore, Lloyds has billions of excess capital waiting to absorb bad debts as we move into 2021. For me, this solidity should support and later lift the Lloyds share price next year.
Finally, share prices never rise in straight lines, so the first half of 2020 might well be a bumpy ride for Lloyds shares. But the banking regulator has already given British banks approval to resume paying cash dividends in 2021. For Lloyds, this welcome announcement could come as early as February. When Lloyds resumes rewarding shareholders in cash for their patience, I expect its shares to soar. That is why this is one of my top UK shares for next year. Hence, I’d happily buy and hold Lloyds shares in my ISA today to enjoy tax-free dividends and capital gains.