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As an investor, I like to buy stocks and make big profits by holding them for the long term. However, invest in lloyds (LSE: LLOY) in recent years would have made it difficult. The bank’s share price is within 1% of where it was a year ago, even after a recent strong rally. It is 23% lower than its level five years ago. Looking back even further to the financial crisis, Lloyds shares are selling today for just a sixth of their high 2007 price.
Even further back things look even worse! Lloyds’ share price flirted with £5 in 1998. Lately it has been flirting with 50p, about a tenth of its value a quarter of a century ago.
Has anything changed that might convince me that buying Lloyds today might be a good move for me as an investor?
growth or income
One thing to consider is the dividend.
While my previous numbers focus on share price movement, dividends have been a source of income for Lloyds shareholders for part of the last quarter century. Right now, for example, the yield on Lloyds shares is 4.1%. This year’s interim dividend saw a strong 12% increase compared to last year.
However, Lloyds stopped their dividend during the pandemic (due to a regulatory requirement). It is still not back to its former size, despite huge gains last year that enabled a £2bn share buyback.
It was a similar story during the financial crisis.
After 2008, the dividend was suspended until 2015. No dividend is ever guaranteed. But Lloyds has proven rather unreliable over the long term when it comes to dividend consistency, compared to companies like Spirax-Sarco either DiageoThey have increased your annual payment for decades through thick and thin.
attractive valuation
One result of the long-term decline in Lloyds shares is that their valuation looks increasingly attractive.
The price-earnings ratio is now only nine. It is common to value bank stocks using the alternative measure of the price-to-book ratio. On that basis, too, I think Lloyds shares are currently attractively priced as a possible addition to my portfolio. Past performance is not a guide to what comes next. The fact that the Lloyds share price has experienced a long-term decline does not necessarily mean that the same will happen in the future.
Lloyds still has the makings of a great business, as evidenced by its profitability. It benefits from well-known brands, a large customer base and strong demand for financial services in the UK. UK banks, including Lloyds, now have a stronger approach to risk management than before the financial crisis.
difficult environment
But those valuation metrics are based on current earnings and book value.
If the recession causes loan defaults to rise sharply, the bank’s profits and book value could drop significantly. The bank has said that defaults remain at low levels. But after-tax profit for the first nine months of last year fell 24% compared with the prior-year period. I’m afraid things could get worse from here.
That risk, of a bad economy increasing defaults and hurting earnings, is enough to discourage me from investing in the bank at this time. I have no plans to nibble, even at the current Lloyds share price.
