The Lloyds Banking Group (LSE: LLOY) share price has remained pretty robust despite the growing stormclouds approaching the UK.
Some investors may be surprised at this. Like any bank its profitability is highly sensitive to broader economic conditions. And whatâs more, Lloyds relies solely on British customers to drive its bottom line. Other FTSE 100 banks like HSBC and Barclays have foreign operations to support profits.
For others, the benefit of rising interest rates still make the bank a buy. Higher rates allow banks like Lloyds to enjoy bigger returns on their lending activities.
So should I buy Lloyds for its rock-bottom share price? And what dividends can I expect to receive from the stock?
The latest Bank of England (BoE) economic healthcheck gives a useful guide as to where Lloyds could be heading.
Firstly, on Thursday the BoE hiked its forecasts again for consumer inflation. It now expects it to peak at 13% this year, raising the prospect of further chunky interest rate hikes.
Policymakers just raised the benchmark rate to 1.75% from 1.25%. This was the sixth straight increase and the largest single hike for 27 years.
Encouragingly for Lloyds, analysts at Morgan Stanley believe there could be a flurry of similarly sized hikes in the months ahead to tame inflation. This would likely provide another significant boost to the margins banks gets from lending money.
Yet on balance, I won’t buy as I think the BoEâs update provides more for Lloyds and its investors to worry about.
It expects the British economy to enter recession later this year and keep contracting until the end of 2023. This would be the longest downturn since the 2008 financial crisis.
This is grim reading for cyclical companies like Lloyds. And itâs possible that things may end up even worse than the central bank predicts. After all, itâs made a habit of upping its inflation forecasts and slashing its GDP estimates in 2022.
Lloyds has already set aside Â£377m to cover possible loan impairments. And I expect it to continue adding to its provisions in the short-to-medium term at the expense of profits.
What about Lloydsâ dividends?
|Price movement in 2022||-8%|
|Forward price-to-earnings (P/E) ratio||6.6 times|
|Forward dividend yield||5.6%|
|Dividend cover||2.7 times|
As I said earlier, I think Lloydsâ share price has held up relatively well given the threat of a long and painful economic downturn. But I feel it’s in danger of sliding as conditions on the ground really start to deteriorate.
But what does this mean for its dividends? Well, City analysts still believe the bank will lift dividends in both 2022 and 2023 (to 2.54p and 2.62p per share respectively).
And these projections are well covered by anticipated earnings. But while I think it’s is in good shape to meet this yearâs estimate Iâm not so sure about 2023.
Dividend cover falls to a still-robust 2.5 times for next year. However this is based on predictions of a modest year-on-year 3% earnings fall.
Itâs my opinion that profits could fall much more than current forecasts suggest as bad loans stack up and revenues slump. And this could leave Lloydsâ progressive dividend policy in tatters.
The post Lloydsâ share price is still dirt-cheap! Should I buy it for its dividends? appeared first on The Motley Fool UK.
Markets around the world are reeling from the current situation in Ukraine… and with so many great companies trading at what look to be ‘discount-bin“ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
- Should I buy Lloyds shares while they’re still under 50p?
- 3 stocks that could prosper after the historic interest rate rise!
- 2 cheap shares I bought for dividend income
- 5.6%+ yields! Could these FTSE 100 dividend stocks supercharge my income?
- Is the Lloyds share price low enough to buy now?
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, 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.