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How to trade the Lloyds share price as H1 earnings loom

Cuts in analysts’ earnings forecasts for Lloyds Banking Group [LLOY] ahead of its upcoming first-half results on 31 July have led to a consensus expectation of a modest 3% rise in full-year revenues to £18.4bn.

Lloyds’ share price, which as of market close on 12 July was trading down 0.7% for the week at 57.82p, is also still way off the 52-week high of 66.79p that it reached on 17 April. But in recent weeks, the stock, which is up 13.9% year to date, has been largely stable.

If the company’s first-half earnings deliver a positive revenue surprise, now could be a good time to buy the stock for a short-term trade, given its low price and a forward earnings multiple of 7.6 times.

But Lloyds’ price-to-earnings ratio of 10.51 makes the stock slightly more expensive than both Barclays [BARC], which has a P/E of 8.10, and HSBC [HSBC], with its P/E of 9.62.

Yet Lloyds’ dividend yield remains an enticing 5.55% and it pays out almost 96%, while its earnings per share (EPS) is 5.5. Based on those measures, the bank beats the FTSE 100 average.

Lloyds’ dividend has increased every year since 2014, with the last three years seeing rises of 13.3%, 19.6% and 5.25%, respectively.

Brexit and mortgage gloom

Uncertainty related to Brexit and questions about how the next prime minister will try to resolve the issue will continue to weigh on the British economy and thus the banking sector. Yet the UK housing market is also causing headwinds for the country’s banks. “Stability in the mortgage approvals gauge owes much to the ultra-competitive market, which is reducing homeowner costs at the expense of profits for Lloyds et al,” wrote Royston Wild in a piece published by The Motley Fool.

“Stability in the mortgage approvals gauge owes much to the ultra-competitive market, which is reducing homeowner costs at the expense of profits for Lloyds et al” - The Motley Fool, Royston Wild

 

The rate of consumer credit growth has also been falling in recent months, reaching just 5.6% in May, representing the lowest levels of consumer lending since April 2014. This is the context in which analysts cut their earnings forecasts for Lloyds, with further downgrades possible.

 

Market cap£40.89bn
PE ratio (TTM)10.53
EPS (TTM)5.50
Forward annual dividend yield5.57%

Lloyds share price vitals, Yahoo Finance, 15 July 2019

 

Some reasons to be hopeful

“There is one key event, though, which I predict could see substantially more cash being distributed to [Lloyds] shareholders in dividends, which will soon be paid quarterly,” said Mark Howitt, a Motley Fool analyst. “That is the end of PPI payouts, which is fast approaching on 29 August. This can’t come soon enough for Lloyds, with the bank being forced to shell out £19.4 billion to date over the 16 million policies it sold since 2000.

“In addition to this, there are signs of strength for the UK economy, which is of paramount importance to Lloyds. Unemployment is at a 43-year low and wage growth is reasonable. The end of the public sector [pay] cap gives scope for extra income to millions of households,” Howitt said.

Another important consideration is Lloyds’ dividend yield, with Morgan Stanley expecting a £2.5bn share buyback to come before the end of the year. This would increase Lloyds’ dividend yield to 12% from the current 5.55%.

The company continues to be the biggest provider of mortgages and current accounts in the UK. It had 12.7 million active digital users in 2018, “a number that has been growing year on year”, Howitt said.

“Over time,” he said, “I believe this could lead to more branch closures, further reducing Lloyds’ costs.”

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