Our view here at The Motley Fool couldn’t be clearer. Share investors shouldn’t be discouraged from building their stocks portfolios after the stock market crash. Instead, they should embrace the opportunity to buy some top-quality UK shares at rock-bottom prices.
Of course, investors need to be careful when it comes to buying on the dip. Sure, plenty of great UK shares have been unfairly washed out along with the bad. But some well-known British blue-chips now carry low valuations because of their colossal risk profiles. Many can be considered bona-fide investment traps, even at current prices.
A look at the Lloyds share price
Take Lloyds Banking Group (LSE: LLOY) as an example. The FTSE 100 banking goliath has more than halved in value since the beginning of 2020 as earnings look on course to collapse. Brokers predict that annual profits will sink 64% this year.
The bank has its fans though, and some investors believe it’s a great value buy ahead of a profits recovery in 2021. City forecasters reckon the bottom line will swell more than 200% next year as the Covid-19 economic hangover lessens. This leaves Lloyds dealing on a forward price-to-earnings (P/E) ratio below the bargain-basement level of 10 times.
In addition, broker suggestions reckon Lloyds will become an attractive dividend option for investors in UK shares again in 2021. They predict that the bank will pay a 1.9p per share reward. And this creates a bulky 6.5% dividend yield.
Risks ahead
The Lloyds share price is cheap then. But it’s cheap for a reason. Well, several very good reasons, in my opinion, which include, but aren’t exclusive to:
- The UK economic downturn becoming more severe than initially expected. A great many experts have been caught out by the scale of the financial consequences of Covid-19. Esteemed forecaster EY Club has just increased its predictions for the second quarter economic slump to 20%. This is up 5% from just a few weeks ago. And it’s not the only expert to slash its estimates. Hopes that Lloyds’s profits will rebound strongly next year look more than a little shaky, in my opinion.
- Lloyds’ lack of overseas exposure. The International Monetary fund says UK economic growth will be the second-worst in 2021 across all advanced economies, behind only Japan. This means that Lloyds’ revenues could lag behind those with foreign operations, such as Barclays and HSBC, next year and possibly beyond too.
- The decision to cut dividends has been a major reason why the Lloyds share price has plummeted in 2020. Britain’s banks acted on instruction from the Bank of England at the height of the Covid-19 crisis. And speculation is growing that Threadneedle Street might stop the likes of Lloyds restarting their dividend policies from 2021. That 6.5% dividend yield also looks like it’s standing on thin ice too.
Buy better UK shares
So why take a gamble on the Lloyds share price when there’s many other quality stocks to buy at low prices. The stock market crash provides plenty of great stock buying opportunities today. But buying Lloyds isn’t one of them.