At a time when Brexit weighs on the FTSE’s financial services stocks and European banks seem incapable of offering decent returns for shareholders, Lloyds Banking Group's [LLOY] share price stands out as an exception. With a forward dividend yield of 5.66% and a payout ratio close to 96%, the stock's current return performance has few equals not only among sector peers, but FTSE 100 ones too.
Based on the past three years, the share price has a remarkably low monthly beta (the measure of a stock’s volatility relative to that of the wider market) of 0.48, meaning Lloyds shares have fluctuated far less than most equities. Taken together, all these factors at first glance make owning Lloyds more suited to an income portfolio than a short-horizon trading strategy. But is there room for both plays?
More rewarding stock than its peers
Every major UK bank currently has to contend with the same set of macro challenges: an unclear direction for base rates, the end of liquidity stimulus programmes at the Bank of England, competitive pricing pressure and, of course, a customer base wary of taking on debt ahead of Brexit.
While Lloyds is not immune, the general picture emerging from analysts is that its idiosyncrasies may provide more resilience than its competitors. In late May, analysts at Bank of America Merrill Lynch said they expected a £2bn impact on Lloyds’s revenues between 2018 and 2021, as heated competition in residential mortgages puts pressure on pricing. But last month, RBC Capital Markets wrote that mortgage rates across the board will eventually “converge with Lloyds, leading to more stable margin but perhaps better growth as the market normalises”.
BofAML's predicted impact of mortgage pricing pressure on Lloyds' revenues between 2018 and 2021
Also in June, Morgan Stanley reiterated Lloyds as its top pick among UK banking stocks, thanks to a “compelling” valuation. Lloyds was trading at just over 10 times earnings for the past 12 months, higher than Barclays’s [BARC] 7.9 but well below RBS’s [RBS] 17.8. Adding to the stock’s attractiveness, its share price is just 0.83 of book value, compared to an average of 3.0 for the industry.
What will it take to move shares?
Lloyds’ share price closed at a high of 66.57p in late April – a level it last touched in May 2018. Since then, the stock has slowly but inexorably fallen, closing around the 60p mark last week. So, while the regular dividend stream can make it a keeper in the eyes of value investors, that doesn’t mean there isn’t room to trade on the stock’s movement if taking the long view.
|PE ratio (TTM)||10.48|
|Return on equity (TTM)||9.00%|
Lloyds share price vitals, Yahoo finance, 02 July 2019
More volatility could be in store. According to a June report by UK-based company Irithmics – which uses artificial intelligence to forecast stock movements – institutional investors may soon develop an appetite to short stock or cash in before the share price falls further. The stock’s vulnerability to potential “systemic selling or shorting” was “very low” through the first three months of the year – the lowest grade on Irithmics’s scale. But the threat level has been steadily rising, until it hit the highest level in May before falling down one notch to “high” last month.
According to Irithmics, that doesn’t mean the stock is being shorted or sold off right now, but it does indicate there is a high probability traders may soon decide to adopt either tactic as they sense a coming drop in price. Whether the forecast turns accurate or not, shifting stock-picker sentiment may bring some action to a name on the stock market that, in uncertain times for British Plc, has been as subdued as the FTSE gets.
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