I’m sorry, I hate to remind you about Brexit again, I know you need a break from it all. But I just want to examine the impact the shambles is having on the UK’s most traded stock, Lloyds Banking Group (LSE: LLOY).
Domestic row
Lloyds has the greatest domestic focus of all the major high street banks, and is the UK’s biggest mortgage lender, which gives it massive exposure to the fortunes of the country’s economy and housing market as we reach peak Brexit.
HSBC Holdings, by contrast, generates around 90% of its revenues from Asia. If you want to Brexit-proof your portfolio, that might be a good place to start, while Barclays generates around half of its earnings overseas. Lloyds, however, is in the thick of it, as is Royal Bank of Scotland.
Bad times
After peaking at 72p in mid-January the Lloyds share price has edged steadily downwards and now trades below 57p, a drop of just over 20%. That is double this year’s slide on the FTSE 100 as a whole, which is down 9.75%.
This is a dismal performance from a stock that many thought was undervalued at the start of the year. Not that Barclays or RBSÂ have done any better in what has been a bad year all-round for the banks. Next year could be tough too, as they brace themselves for a final surge in PPI mis-selling claims.
Feel the fear
When Antonio Horta Osorio took over in 2011, the bank was making a loss of £260m. Last year it posted a £3.5bn profit yet its share price is actually lower. It looks a tempting buy trading at just seven times earnings, against 15.94 times for the FTSE 100. If you believe in buying when others are fearful, you know what to do here.
The fear factor is certainly very high now as we enter a world of political uncertainty, assuming that Theresa May loses Tuesday’s vote on her deal (which seems the right assumption to make at time of writing).
Deal or no deal
However, after days of political turmoil many commentators believe the chances of the UK crashing out of the EU have receded, because MPs have voted themselves a say on the final deal, and there is no majority in Parliament for a no-deal Brexit. Lloyds rose 2% on Wednesday as a result.
Lloyds currently has a forecast dividend yield of 5.9% for 2018 with generous cover of 2.3, and that is forecast to climb to 6.4% next year. That looks difficult to resist, especially when combined with its low valuation. Here are three more reasons to buy it.
Think income
Lloyds is a binary play right now. If we get some sort of Brexit deal, or at least more clarity, then its shares could fly, along with the pound. If we crash out amid chaos, it could plummet. FTSE 100 companies with large overseas earnings have some ballast, Lloyds doesn’t.
I cannot second-guess how Brexit will turn out, the permutations are mind-boggling. So place your bets but I would say this: in the long run, Lloyds still looks like a bargain-priced dividend winner to me.