A few months ago, I found myself pondering the following meaty question: is Lloyds Banking Group (LSE: LLOY) my worststock pick EVER?
Top stock pick
The reason I was agonising so much was that in December last year I boldly proclaimed that Lloydswasmy top stock pick for 2016, with predictably dismal consequences. Within two months the share price had plunged from 72p to 56p, a drop of 20%.
Here we are at the end ofAugust and Lloyds still isnt flying, trading at just 59p. None of us can see the future and I certainly didnt anticipate Brexit, with the chance of the UK actually voting to leave the EU a slim possibility at the time. Thatmomentous decision shattered all the major banking stocks and sent UK-focused Lloyds crashing to a 52-week low of 47.55p. It has started to recover as the initial Brexit panic recedes, but is still a long way from stock of the year.
Stepping out
As ever with Lloyds, this year has beena case of one step forwards, two step backwards. Or should that be the other way around? The restoration of the dividend wasa welcomeleap ahead andright now the stock yields 3.76%, with the prospect of more to come. The forecast yield for December is 5.5%, and a juicy 5.9% for the end of 2017, even ifthese have been scaled back slightly. Who wouldnt want to lock into such an income stream?Mind you, I made that argument when the share price was at 72p, and look what happened next.
Investors can brush off the embarrassingly public fallout from chief executiveAntonio Horta-Osorios affair duringa business trip to Singapore and should concentrate on the fundamentals. Im not too concerned by the drop in its Tier 1 capital ratio to 10.1% in the recentEU-wide stress test, down from its 2015 year-end position of 13%. This remains significantlyabove the groups minimum capital requirements and has even allowed Lloydsto boast of its strong capital position.
Half time
First half results were solid but unspectacular, with a 2% drop inunderlying profit to4.2bn for the first halfand the underlying return on equity slipping from 16.2% to14% year-on-year. The 13% rise in theinterim dividend will have longer term (positive) consequences. However, these results were pre-Brexit, and an uncertain pointerto the future.While the Leave camp iscrowing right nowwewont know the true impactof Brexit until Article 50 is finally triggered, which may not be for another year. Lloyds is still vulnerable to a domestic slowdown.
Investorswill be buoyed byearly signs suggesting the property market is holding up, helped byrecord low mortgage rates and the imbalance between supply and demand. However, earnings per share are forecast to fall 14% this year and another 14% in 2017, suggesting a bumpy road ahead. I still believe that Lloyds will deliver, but we may be in fora wait. PerhapsI should have named Lloyds mytop stock for 2018.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
