I invested in Lloyds Banking Group (LSE: LLOY) back in September 2015. And it’s fair to say that the Lloyds share price hasn’t been kind to me since. I paid 76p per share so, six years on, I’m sitting on a loss of around 45%. I’ve had some dividends, which have helped offset the pain (a little). But it’s still a pretty poor performance.
How can I analyse what went wrong, and decide what to do about my Lloyds holding now? In situations like this, I like to pretend I don’t hold the stock, Then I try to decide whether I’d buy today, starting from scratch.
For that, I need to go back and uncover what’s happened to get Lloyds in its depressed state today. And then, start thinking about the future. I’m not going to relate the Lloyds share price history over the years, but I do want to think about some key events. And how they damaged Lloyds’ performance.
When I bought, we’d already been through the great financial crash, and things were starting to look better for the banking sector. We’d also been through a few years of no dividends. Still, after the near total collapse of the developed world’s banking system, that wasn’t the most pressing concern.
Early dividend recovery
Then, in 2014, Lloyds managed a modest dividend of 0.75p per share (the most the PRA would allow at the time). Balance sheets across the sector were strengthening, and the UK’s banks were passing their annual stress tests with flying colours. By 2018, I was pocketing my 3.21p per share dividend. On my original purchase price, that was a yield of 4.2%. I was happy with that.
But, by then, the Lloyds share price had been sliding for a couple of years. And that was down to the UK’s Brexit vote, and the horrible uncertainty it piled upon the banking sector.
London had been Europe’s banking centre, but those days were over. While Barclays, for example, shifted a good bit of its attention to its US operations and international investment banking, Lloyds reshaped itself as a UK domestic bank.
I think that was a reasonable move. And probably a safe one. But it did heap continuing uncertainty on the Lloyds outlook. And the share price remained low. But I was still happily pocketing my 4% per year or so, and all the indications were that the dividends would keep in rising.
Lloyds share price future
Then came Covid-19. Fears of devastation for the financial sector grew, and then came the suspension of dividends, at the direction of the PRA . If we Lloyds investors had been suffering from years of uncertainty, this was nothing compared to what we now faced.
So what does the future hold? Well, stacks more uncertainty, that’s for sure.
The Lloyds share price had been recovering in 2021, and I was happy to see it finally hit 50p once more. But since early June, it’s been on a slide again. There appears to be two key factors behind that.
Low interest rates
One is that UK interest rates have been very low for a very long time. And that’s not good news for banks, which make money by lending money and charging interest on it. Very low base rates can put a serious crimp on the margins a bank can achieve.
And inflation is coming for sure, as rising inflation tends to result in rising interest rates. But a UK economy heading out of the pandemic looks precarious. And I seriously doubt that the Bank of England will want to do anything to risk our recovery. So I really don’t think we’ll see any significant interest rate rises coming our way any time soon.
A shaky economic outlook is bad for banks generally anyway. If confidence is low, businesses will reduce their ambitions. That means they’ll borrow less.
Investing in rental property
The other thing that seems to be holding the Lloyds share price back is this new landlord business. In a venture with Barratt Developments, Lloyds plans to invest in 50,000 rental properties over the next 10 years.
I’m a little wary about that, though I do actually see it as a possible winning move for the long term. The short-term problem is that it’s not what banks usually do. And it’s not what a lot of people who invest in banks want banks to do. If you want to put money into a pooled investment to earn property rental income, wouldn’t you go for a real estate investment trust (REIT)? And certainly not a bank?
As it happens, I like property investments and I’ve a few REITs on my watch list. So I don’t mind a bit of exposure to the business through my Lloyds holding. But until Lloyds can prove itself, I envisage an ongoing drag on the share price.
It’s all about dividends
So what’s my bottom line take and what am I going to do about it? Well, I bought Lloyds simply as an income investment. So dividends are really all that count for me.
Now, I don’t want to make any assumptions about future dividend levels, but the bank’s resuming its progressive dividend policy. I don’t expect much of a yield this year. But if Lloyds can get back to 2018 levels of dividends, I’d be back to that 4.2% yield on my purchase price.
Those investing at the current Lloyds share price would see more than 7%, but I’d still be happy. Actually, maybe I should buy more while they’re cheap.
Lloyds share price outlook
So to sum up, I can see a mixed outlook for Lloyds. I’d love to see the share price getting fixed on a nice upwards path. But I suspect today’s risks might prevent that for some time yet. Against that, I can see significantly improving dividend prospects for the medium and longer term.
If I were seeking dividends afresh today, I might look elsewhere because I see some other cracking prospects out there. But, right now, I’m definitely holding onto my Lloyds shares.
The post Here’s what you need to know about the Lloyds share price appeared first on The Motley Fool UK.
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.