Lloyds Banking Group (LSE: LLOY) stock looks like it’s offering decent value. At least it is by the indicators I use to help analyse most businesses.
For example, with the share price near 49.3p, the price-to-tangible-book value is running near 0.9. The forward-looking earnings multiple for 2022 is about 7.8 and the anticipated dividend yield is around 4.8%.
But Lloyds is different
If this was a business in a sector such as consumer goods, technology, pharmaceuticals, utilities, IT or others, I’d be buying some of the shares. But it isn’t. It’s a banking business. And they are different beasts altogether.
It would be folly for me to look at Lloyds as a dividend-led investment opportunity. And it isn’t really a growth opportunity either. So what is it?
I think it’s important to be clear in my mind about the answer to that question. After all, well-known outperforming fund manager Peter Lynch suggested putting stocks into categories. If we do that, we’ll know what to expect from them.
To me, that’s useful advice. And it didn’t do him any harm either. He’s one of the most successful investors (known publicly) in history. He achieved an annualised return of just over 29% for 13 years running the Fidelity Magellan Fund between 1977 and 1990.
At first glance, the number 29 doesn’t look that impressive. It’s not triple digits, for example, like we hear some investors achieving. But if I could compound an annualised return of 29% for 10 years, the outcome would be worth having. If I invested £10,000 at the beginning, I’d end up with just over £175,000 at the end.
But what did Lynch have to say about stocks such as Lloyds? Quite a lot, as it turns out. He called such businesses ‘cyclicals’. And two of his books set out one of the best strategies for investing in cyclical companies that I’ve so far come across. Indeed, he covers the subject well in his books One Up on Wall Street and Beating the Street.
Why I’d keep the stock on a short leash
One thing that comes across from the books is cyclical companies do not lend themselves well to long-term investing strategies. And the banks can be among the most unstable investments of all the cyclical firms.
One feature of the trading and financial record of Lloyds, for example, is the volatility of revenues, earnings and shareholder dividends. And that record has led to frequent plunges and surges in the share price. Indeed, Lloyds’ business is super-sensitive to the ups and downs of the wider economy.
So a long-term investment in Lloyds strikes me as similar to playing Russian roulette. I could get lucky if my holding period begins in a trough and ends on a peak. But I could lose money, or suffer a dead-money investment if my holding period happens to begin at a peak and end in a trough. Having said that, there’s a place in my portfolio for cyclicals like Lloyds from time to time. But I’ll always keep them on a short leash and watch them closely.
Nevertheless, Lloyds Bank shareholders have enjoyed a great year with the stock up more than 30%. And it wouldn’t surprise me to see further advances in 2022.