On paper, it’s clear to me that Lloyds‘ (LSE: LLOY) share price offers great value for money. I’m not alone either. The Black Horse Bank is one of the FTSE 100’s best-loved cheap dividend stocks.
Today, Lloyds trades on a rock-bottom price-to-earnings (P/E) ratio of just 7.2 times. This means its share price commands a lower valuation than fellow Footsie banks NatWest (10.2 times), Standard Chartered (8.5 times) and HSBC (9.1 times).
As I said, Lloyds is particularly popular with FTSE 100 investors looking for dividend stocks. Its dividend yield sits at 5.2% for 2022 and an even more impressive 5.7% for next year. The Footsie average sits way back at 3.7%.
UK economy to stall in 2023?
The Lloyds share price might be cheap. But, in my opinion, this reflects the company’s extremely high risk profile. Banks’ profits are highly-sensitive to broader economic conditions. And I worry about Lloyds’ prospects, given its dependence on a strong British economy.
On Wednesday, the OECD was the latest body to slash UK growth forecasts for the medium term. It cut its 2022 estimates to 3.6% from 4.7%. And it said it expects no economic growth next year, putting the UK in 19th place of the G20 nations (above only Russia).
Long-term problems
I’m concerned about the long-term outlook for Lloyds too as Brexit weighs on the economy. The Office for National Statistics says exports to the European Union fell £20bn in 2021, the first full year after Brexit.
New Brexit red tape scheduled for the years ahead could spell more trouble for the UK economy. And a full-on economically catastrophic trade war could be in store too if the government abandons the Northern Ireland protocol.
Lloyds’ lack of overseas operations also doesn’t give it a chance to capitalise on emerging markets like many other UK banks. Financial product penetration in many developing nations is low and growing strongly as personal wealth levels and population numbers increase.
HSBC and Standard Chartered derive most of their profits from Asia, for example. Meanwhile, Banco Santander is a big player in Latin America. And I can select smaller operators such as Georgia-focussed TBC Bank too.
A boost to Lloyds’ share price?
On the plus side, the Bank of England is raising interest rates at a pace not seen for decades. This presents an opportunity for Lloyds to boost the profits it makes on its lending activities. Higher rates mean a larger difference between what it provides to savers and borrowers.
But, on balance, I think the problems of owning Lloyds shares outweigh the potential benefits. The FTSE 100 bank has fallen 17% in value since its 2022 highs set in January. And I reckon it could continue falling heavily should — as I expect — revenues begin to drag and the number of bad loans mount. I’m not buying.