How long can a bad thing last? If you are talking about the post-financial crisis banking sector, the answer is a very long time indeed. But is there any light at the end of the tunnel?
Bad banks
Lloyds Banking Group (LSE: LLOY) saw its share price peak at a mighty 5.67 in April 2007, which isnt far off a decade ago. Today, you can pick up its stock for the apparentlybargain price of 55p, less thanone-tenth of its former high. It may looklike a bargain but be warned plenty of investorshave been tempted by such a prospect, only to get badly burned.
If you bought the stock one year ago today, your holding is nowworth 28% less. Todays price of 55p iswell off its 52 week-high of 77.52p. Investors patiently waiting for the great leap forwards have to face facts: they have been moving backwards instead. So is it timeto pack up and go home?
Storm clouds
I can see little sign of a quick comeback. Life is set to remain tough in the banking sector, as the string ofregulatory and mis-selling crackdowns is far from over. This will continue to cast a cloud over wider investment sentiment,even ifLloyds keeps its nosecompletely clean (unlikely, given that it was the worst PPI offender).
Lloyds does have some insulation against Brexit fall-out, because in its new stripped down version it is primarily a play on domesticretail and small business sectors. However, it will be punished by lower interest rates, as this will squeeze net interest margins. If Brexit shrinksthe UK economy itwillshare inthe pain, withrising customer defaults and slower lending growth. Hence itspost-referendum share price ravaging.
Bottoming out
Banking sector sentiment is rock bottom now, but this could actually make Lloyds tempting. For a start, it now trades at 6.49 times earnings. I nearly said a bargain 6.49 but that would be silly, because nobody knows what represents good value in this sector anymore. Still, it is low. Even better, share price slippage means that the dividend hasnow increased to 4.11%, at a faster pace than analysts originally predicted.
With cover of 3.8 there is plenty of scope for growth, and the yield is forecast to hit 5.5% by the end of the year, which would be a festive present. By Christmas2017 it is expected to hit 6.3%, potentially making itthe gift that keeps giving. A low price-to-book ratio of 0.8 suggests that the stock is undervalued and in many respects, it is.
Income joy
Thats my jolly positive side talking. One glance at Lloyds earnings per share forecasts are enough to plunge me back into gloom. EPS is forecast to drop by 14% in 2016, followed by another 17% drop in 2017. Revenues and profits are expected to slipnext year. Lloyds still faces a long climb back to respectability.
However, lets not be too gloomy. As the search for yield intensifies, this prospective income stream is almost as juicy as it gets. Investors in Lloydsshould stay faithful for the dividend income, while treatingany share price growth as a bonus.
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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.
