Lloyds Banking Group PLC: Over-Priced, Over-Exposed And Over Here!

Shares in Lloyds Banking Group PLC (LON:LLOY) could be vulnerable

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When American GIs were castigated by the British population as “over-paid, over-sexed and over here” during the Second World War, the antipathy of the British population was tinged with admiration. I have similar mixed feelings towards Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US).

Its turnaround has been remarkably successful, with the benefits of self-help restructuring amplified by the unexpectedly strong recovery in the UK economy. But Lloyds is very much ‘over here’: following a Dunkirk-like retreat from Europe, it is now almost entirely dependent on the UK. Arguably, it is also over-exposed — especially to the housing market — and its stock is over-priced.

Over-exposed

Reliance on the UK economy makes the shares vulnerable. Expectations that the Britain will continue to thrive are baked in. It may be a reasonable central projection, but there’s plenty of downside risk. I think it’s significant that three component distributors, Electrocomponents, Premier Farnell and Brammer, all issued profit warnings this month, citing weak UK sales and/or intensified competition. These suppliers of bits and bobs for industry are a bellwether for that sector.

The housing market is supported by artificially low interest rates. It looks as though Bank of England Governor Mark Carney has no intention of raising rates soon, fearing deflation and no doubt reluctant to upset the apple-cart before next May’s general election, but he can’t hold them down indefinitely. The national debt is larger than ever, as is the trade deficit, and the pound has lost a fifth of its value since 2008. Per-capita GDP is still below pre-financial crisis levels, and the Central Bank is cutting its growth forecasts.

The approaching General Election adds uncertainty. If the economy wobbles before May that could make a Labour victory look more likely. Some might see David Cameron’s “red warning lights on the dashboard of the global economy” as preparing the electorate for poorer-than-expected economic news. Rising anticipation of a Labour victory would be bad for stocks like Lloyds: Labour leader Ed Miliband has talked of breaking up the high-street banks.

Lloyds faces some specific challenges, too. It has built up expectations of a return to the dividend list, but its performance under the ECB’s capital stress test has potentially jeopardised that. A Competition Commission review of the market for current accounts doesn’t help, either.

Over-priced

These downside risks wouldn’t be so dangerous if the shares were more reasonably priced. Lloyds’ forward PE is broadly in line with the rest of the sector, but in these days where banks report half-a-dozen or more profit figures, investors have paid more attention to price:book ratios. On that basis, Lloyds’ 1.4 price:book is significantly more expensive than its peers, highlighting how much anticipation of future growth is built into the share price.

So for me, Lloyds is a share that has many attractions, but not right now, at this price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Tony Reading 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.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »