Shares in Lloyds Banking Group (LON:LLOY) have been hit hard since the covid-19 crisis. I, unfortunately, mistimed my purchase of the shares which are currently my biggest loss. Despite that, it’s one share price though where I’m feeling confident to average down; although I haven’t as yet done so recently having already been punished for averaging down. Even after this experience, there are three main reasons why I’ll be happy at some point in the not too distant future to add to my holdings.
- House prices are holding up and the economy is recovering (possibly and for now!)
- The bank is well run and keeps a lid on costs
- The potential to reinstate the dividend (even if it’s at a lower level initially)
House prices and the economy
I’ll turn to each of the points above in order. Looking firstly then at house prices and the economy, it’s a mixed picture as might be expected in an ‘unprecedented’ situation such as the one we find ourselves in. While there are fears of rising unemployment as furlough ends and UK debt hitting £2trn, simultaneously house prices have held up (albeit perhaps partially as the result of the Stamp Duty cut) and there are predictions of a V-shaped economic recovery.
If the economy bounces back strongly then banks could be amongst the big winners. Especially as they are cyclical, very much tied to the health of the economy and their share prices have been hit hard this year. Lloyds is particularly tied to the health of the UK economy. This can be a bit of a double-edged sword but it does make the bank leaner and therefore a bit easier to manage. At least by banking standards.
Running Lloyds Banking group
I’d argue that Lloyds is well run, although I’m sure not everyone would agree. Especially if performance is judged on the share price which even before the pandemic wasn’t taking great strides. What I think Lloyds does well is managing costs, keeping the cost:income ratio down, while taking steps to digitise services which can improve under pressure margins. On top of this, the moves into wealth management and credit cards should also help improve margins, particularly at a time when the prospect of negative interest rates is looming like an iceberg on the horizon.
Then on top of that, even if you think António Horta-Osório hasn’t done a good job running Lloyds, he’s due to be stepping down. It was announced in July he’ll be leaving during 2021. It’s unclear who will succeed him. There will also be a new chairman from October, with industry veteran Robin Budenberg, who has a background in investment banking, replacing Norman Blackwell.
The Lloyds dividend
Lloyds like other banks was strong-armed into scrapping its dividend as the pandemic took hold. I don’t think it’ll be able to restore the dividend this year, but once it does hopefully next year, I think that could be a boost. For income investors especially so. Like other companies, the dividend may start off at a lower level than it was pre-pandemic but I expect it to rise back up and provide a generous dividend yield. This was the trajectory pre-pandemic and once things calm down I expect it to be the pattern that resumes.
Overall, I’m in no rush to average down on the shares and fight against the market. For now sentiment is against the UK banks and I imagine Brexit negotiations, the struggling economy and US-China trade tensions could all continue to weigh on the banking sector as a whole, even if only the former two have any real bearing on Lloyds.
What I can confidently predict though is that I won’t be selling my Lloyds shares for a heavy loss and that at some point I will pick up more shares. I’m just not completely sure yet when. It’ll most likely be next year, so 2021, when there’s more clarity on Brexit and fingers crossed less economic fallout from covid-19. Investing in Lloyds shares is not without risks, but I’m with the analysts who’ve given it a buy rating. I think the shares are too cheap but I’ve been burned already so will move cautiously.
If you like this article please do share on social channels and you can follow me on Twitter, my handle is @sharewatch100