The high dividend yield on offer with Lloyds Banking Group attracts many investors who are seeking income and good value. But my fear is that the low-looking valuation may end up being an illusion.
To me, the company’s prominent characteristic is the cyclicality of the underlying business. Banks are known for being ultra-responsive to changes in general economic conditions.
Profits, cash flows, dividends and share prices in the banking sector tend to jump around like fleas in a tin. Indeed, the slightest whiff of the possibility of an economic downturn will often send the shares of banks such as Lloyds plunging.
Profiting from volatility
But volatility in the markets can be good for the FTSE 250’s IG Group (LSE: IGG), which provides CFD, forex, spread betting, and execution-only stockbroking services for traders and investors. And right now, the valuation looks attractive to me.
With the share price at 689p, the forward-looking earnings multiple sits just under 16 for the trading year to May 2021, and City analysts following the firm expect the dividend to yield a little below 6.3%.
Although profits dipped over the past couple of years because of regulatory changes affecting some of the firm’s products, the directors have held the dividend flat. But earnings will likely cover the dividend payments just once.
In today’s half-year results report, the directors declared their intention to maintain the 43.2p per share annual dividend “until the Group’s earnings allow the Company to resume progressive dividends.”
Meanwhile, the outlook statement reveals they expect a return to revenue growth in the current full trading year to May 2020. And analysts have pencilled in a double-digit recovery in earnings for the year after that. My guess is that the dividend is safe, and the firm looks like it’s adjusting well to trading within the new regulatory regime.
A multi-year strategy for growth
Chief executive June Felix explained in the report that IG has been executing its multi-year growth strategy for six months and the firm is “on track” to achieve its medium-term growth targets.
“Encouraging” early indications show ongoing growth in the client base in the company’s core markets, “and convincing progress in the areas identified as significant opportunities.”
Even after bouncing back up by almost 40% from the May 2019 dip, the shares are still around 30% down from the highs achieved in the summer of 2016, before the regulatory changes.
I’m impressed by the determination of the directors to maintain the dividend through the troubled period of change. To me, this is one of those situations where it could be a good idea to buy some of the shares when temporary challenges knock the share price back. And in the case of IG now, we have a positive outlook with the promise of improving finances ahead.