In mid-2015, the Lloyds Banking Group (LSE: LLOY) share price was trading above 85p. But it’s never been as high since and stands near 44.5p as I write. Over the past year, the stock price is more or less flat, although it wiggled about a lot along the way.
The erratic Lloyds share price
Will it ever get as high as 85p again? Maybe. But one of the problems with the Lloyds business is its erratic financial and trading record. Earnings, cash flow and shareholder dividends all show declines in some years as well as gains during others. And the business is vulnerable to the ups and downs of the economy. For example, it suffered when Covid-19 arrived. The share price also reacted when Russia invaded Ukraine, in anticipation of further difficult trading ahead.
Before those events, the financial crisis of 2007-09 was a disaster for Lloyds shareholders and the business. And the inherent cyclicality of the enterprise means the stock market always seems to be marking down the valuation to account for further trouble ahead.
I see the business backing Lloyds stock as low quality. And because of that, it’s not one I’d consider for a long-term investment. Indeed, if there’s the slightest smell of macroeconomic trouble ahead, Lloyds will likely be one of the first stocks to plunge in anticipation. But that works on the upside as well. So, if the wider economy looks set for a period of prosperity, Lloyds will likely soar higher. And it’s under such conditions Lloyds may one day break above the 85p barrier again.
That means it’s desirable to have a strong view of where the economy might be going before investing in Lloyds. And I don’t have one. But the company delivered an optimistic outlook statement with its full-year results report in February. Chief executive Charles Nunn said he’s “confident” the business will deliver higher, more sustainable long-term returns and capital generation for its shareholders. And one positive is the new share buyback programme that could help to support the share price in the months ahead.
The low-looking valuation
But if the UK economy plunges into recession again, all bets are off. And I reckon we will more likely see the stock price fall to near the bottom of its range rather than revisiting 85p near the top. The well known low-looking valuation indicators with Lloyds won’t save investors from the carnage in their portfolios.Â
After all, a low price-to-earnings ratio can ‘correct’ in two ways. The first is for the market to recognise its ‘mistake’ and mark the stock higher, thus increasing the valuation. And the second is for earnings to plunge and ‘correct’ the valuation anomaly.
My guess is the most likely scenario will be plunging earnings at some point. I reckon the days of growthy valuations for bank shares are long behind us and the market has learnt from past mistakes regarding the cyclical banks.
Of course, I could be wrong and Lloyds may shoot back up to 85p and beyond in short order. But I’m seeking my long-term investments elsewhere and won’t be buying the shares.