Lloyds shares are up 11% in five days. Here’s what I’d do next…
The Motley Fool
Published Aug 06, 2020 07:00
Updated Aug 06, 2020 07:40
Lloyds shares are up 11% in five days. Here’s what I’d do next…
It’s far from easy being a bank during the worst economic downturn in 300 years, as I’m sure the bosses of Lloyds Banking Group (LSE: LON:LLOY) know full well. With unemployment rising and no sign of the virus abating, British banks have set aside tens of billions of pounds in loan-loss reserves. That’s why Lloyds shares are in the doldrums.
Lloyds shares have bounced back As I wrote this late on Wednesday, Lloyds shares traded at 28.18p, almost unchanged from Tuesday’s close. This leaves them almost 44% down over the past 12 months. Hardly surprising, given the devastation Covid-19 is wreaking on UK businesses. What’s more, Lloyds shares are down almost two-thirds (61.7%) from their 52-week high of 73.66p, hit on 13 December last year.
In short, it’s been a brutal year for Lloyds shareholders (and for its staff, most of whom own shares in their employer). Now for the good news: Lloyds shares cratered at 25.43p on 31 July and are up 10.8% in five days. But that’s scant relief, given the steep drops of 2019/20.
Lloyds is still a £20bn force in banking Despite the obliteration of the Lloyds share price, there are still arguments for owning shares in this bombed-out bank. For a start, how much lower can Lloyds shares go? Once they were worth several pounds each, but now they lurk below 30p.
For less than the price of a bag of crisps, you can buy part-ownership of a £19.9bn business that has been around since 1695. What’s more, Lloyds owns several well-known, household-name brands, such as Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows.
Lloyds still faces multiple headwinds In its recent half-year results, it unveiled loan-loss provisions of £3.8bn for six months, pushing the bank to a huge loss. What’s more, with furlough support ending and unemployment climbing, there will be many more loan defaults to come. The total for 2020 could easily exceed £5.5bn.
Also, falling interest rates trimmed the bank’s net interest margin down to 2.4% in the second quarter. Likewise, the hiatus in the UK housing market has reduced mortgage lending, where Lloyds is the UK’s #1.
Lloyds shares are still too cheap Give these headwinds, it’s no wonder that Lloyds shares have done terribly lately. But the bank has net tangible assets of 60p a share, more than double today’s share price. In other words, when you buy £1 of Lloyds shares, you get over £2 of assets.
Right now, it’s impossible to value the shares using conventional measures. That’s because earnings per share and dividends have both evaporated. But a discount of 53% to net asset value sounds tempting to me. Hence, I’d keep buying Lloyds as a recovery play and hold them for a future stream of juicy dividends.
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Motley Fool UK 2020
First published on The Motley Fool
Written By: The Motley Fool
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