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Lloyds [LLOY] share price: are recent gains sustainable?

After the stock fell by 23.8% in 2018, Lloyds Banking Group’s [LLOY] share price looks to be a tempting buy for traders and investors. 

Shareholders have enjoyed gains of 22% since the start of 2019, and with a 50-day moving average of 57.24p and a price-to-earnings ratio of 10.68, compared to the 25.16 industry average, the stock looks attractively priced, and good value.Powered by CMC Markets, as at 6 march 2019

 

Lloyds’ financial delivery has been strong as well, with its 2018 earnings rendering it the UK’s most profitable bank. Its year-on-year earnings growth in the last five years has remained consistent at over 20% and outperformed consensus estimates in the last four out of five quarters.

However, the Group’s one-year earnings growth of 27% is less than its five-year average, and significantly less than the British bank’s industry average of 52.2%, according to Simply Wall St. 

In addition, although Lloyds expects to generate £15bn of net inflows in 2019, the market predicts growth to come in at just 9.6% for the year – significantly under the benchmark for high growth, which is estimated at around 20% yearly.

Lloyds still faces headwinds. The bank’s return on equity calls the sustainability of its share price rally into question, and mounting concerns about the potential impact of Brexit continues to cloud its outlook as well.      

 

A dividend buy 

Lloyds is becoming increasingly focused on remaining attractive to shareholders. Its recent announcement of a £1.75bn share buyback as well as a £4bn payout equates to an extra 2.46p per share and when combined with a 3.21p dividend, it brings total shareholder returns in 2018 to 5.66p per share.

Despite seeing a 27% increase in its earnings per share in 2018, the dividend has only been raised 5% since 2017 – but that’s still more than what it was before the financial crisis. It is expected to hit 6.3% by 2020. 

 

Market cap£44.45bn
PE ratio (TTM)11.35
EPS (TTM)5.50
Forward annual dividend yield5.05%

Lloyds stock vitals, Yahoo finance, as at 6 March 2019

 

This somewhat hesitant approach is viewed as part of chief executive António Horta-Osório’s plan to insulate the bank from the growing uncertainty in the markets, which is forecast to continue throughout the year as macroeconomic woes such as sluggish global economic growth, trade disputes and geopolitical uncertainty drag on.  

 

Brexit fears 

As Britain’s biggest high street bank, Lloyds is particularly vulnerable to the economy’s peaks and falls.   

Compared to other British financial services such as the Royal Bank of Scotland [RBS] and HSBC [HSBC], which have warned of Brexit damage, Lloyds has struck a bullish tone with its share buybacks - despite reporting an 18% rise in impairments to £937m last year.

“There is a fear in the financial market that if the UK leaves the EU without a trade deal, interest rates in the UK are likely to go down... the slightly improved situation in relation to Brexit is helping the banking stocks,” CMC Markets analyst David Madden said.

Lloyd’s Brexit contingency plan has seen it apply for a German banking licence and open a subsidiary for its insurance market in Brussels.    

“There is a fear in the financial market that if the UK leaves the EU without a trade deal, interest rates in the UK are likely to go down... the slightly improved situation in relation to Brexit is helping the banking stocks” - CMC Markets analyst David Madden

 

Strong return on equity

Lloyds’ return on tangible equity is market leading and has seen it increase by 2.8% in 2018 due to its substantial increase in profit, which jumped 24% year-on-year to $4.4bn. 

Lloyds expect further improvements in 2019 and forecast a return on tangible equity of 14-15%. It’s average return on grew by 11.7% in 2018.

However, Lloyds is still largely reliant on wholesale banking, as its loans to debt ratio of 107% and assets being 16.6 times the amount of equity, making a return on assets a meagre 0.73%. 

With a market cap of £43.8bn and a history of generating big profits with little equity capital, Lloyds expects to deliver ongoing capital build of 170 to 200 basis points every year and a margin of around 290 basis points in 2019.

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