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With the Lloyds share price so low, is now a good time to buy?

The Motley Fool logo The Motley Fool 4/29/2020 James J. McCombie
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Shares in Lloyds Banking Group (LSE: LLOY) have shed just about half their value since February, hitting a multi-year low in the process. They now sit at around 33p. Are they worth a buy?

Lloyds will release first-quarter results tomorrow – expect them to be ugly. Barclays recently reported a 42% decline in profits for the first quarter of 2020. Substantial credit impairment charges of £1.2bn, double consensus estimates and five times higher than this time last year, took their toll on Barlays’s bottom line. Things could have been worse. Barclays trading and investment banking divisions had a stellar quarter.

Lloyds does not have trading or investment banking operations. It will likely report a dramatic fall in profits tomorrow as impairments hit its loan book. There is a suggestion that banks are aggressively front-loading losses on loans, taking advantage of new accounting standards not intended for that purpose. Perhaps they are, but no one can doubt that the economy has soured, and bad debts will spike. How significant the spike will be is a matter of judgement.

Dividend cut

Since the stock market crashed and the UK went into lockdown, the only communication equity investors in Lloyds have received was a short note concerning dividends. Lloyds has cancelled its final 2019 dividend and won’t be paying anything for 2020.

Back in February 2020, Lloyds was already warning about profitability due to the low-interest-rate environment, squeezed margins, and a lacklustre economy. The outlook now is far bleaker and Lloyds share price slide reflects that. In fact, Lloyds shares have only been at these types of levels for a few weeks in 2009, and about nine months between 2011 and 2012.

So, are Lloyds shares currently a bargain? They could be if Lloyds can survive the crisis and start to pay dividends as it once did. Lloyds paid a 3.27p dividend per share in 2018. If dividends return to that level, then shares bought now could eventually yield around 10%.

Stress testing survival

Can Lloyds survive? They have entered this crisis in a much stronger position than before the great financial crisis. That’s due to regulations intended to reduce the chance of collapse if something similar happened again. Lloyds passed the Bank of England’s 2019 stress test, satisfying the central bank that it could cope with an imagined worst-case scenario.

The annual stress test has been cancelled for 2020 since a real-life one is currently occurring. The coronavirus could be more severe than any previous stress test. The problem is that no one can say with certainty, but some forecasts for unemployment and GDP drops make the stress tests look benign. However, the Bank of England believes that major UK banks, like Lloyds, will survive. They almost have to, as they are needed to assist the government with its support for consumers and businesses.

Long-term lending

Given that Barclays reported its results today, and Lloyd’s share price fell a bit but quickly recovered, I think the event of Lloyds issuing disappointing results tomorrow is in the price, as are the dividend cuts. Of course, if tomorrow’s release it is truly shocking, then the price may fall further.

I have confidence that Lloyds will survive and eventually start paying dividends again. In the long term, I think it is attractive. In the short term, not so much as it will probably be volatile in both directions.

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James J. McCombie owns shares in 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.

The post With the Lloyds share price so low, is now a good time to buy? appeared first on The Motley Fool UK.

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