2018 should have been a year of celebration for shareholders of Lloyds Bank (LSE: LLOY). After finally getting the government off the shareholder register in 2017, the bank has been able to draw a line under its past mistakes and focus on growth for the first time in a decade.
The figures speak for themselves. City analysts believe the company will report net income of £5.5bn for 2018, its most substantial profit since the government bailout. What’s more, a significant percentage of this income is expected to be returned to shareholders with a per share dividend of 3.3p pencilled in for 2018, giving a dividend yield of 5.5% at current prices.
And as well as booming profits, Lloyds’ balance sheet now looks more secure than it has done for many years. At the end of the first half of 2018, the lender reported a CET1 capital ratio of 14.5%, above the European average of 13.8% as published by the European Central Bank last year.
Underperformance
Unfortunately, it looks as if the market does not care about how far Lloyds has come over the past 10 years. Year-to-date, shares in the lender have fallen by 13% excluding dividends, underperforming the FTSE 100 by 5%.
The underperformance is even more shocking over the past five years. Since the end of 2014, Lloyds has been dead money. Even including dividends the stock has yielded a total average annual return of -1.4% since October 2014. Over the past 10 years, the total average annual return is -5.5% and over 15 years it is -2.7%. Based on these figures, a £1,000 investment in the FTSE 100 five years ago would be worth nearly 40% more today than a similar investment in Lloyds made at the same time.
The question is, will this performance continue?
Fundamental focus
Fundamentally, Lloyds is stronger today than it has been for a decade, but for some reason, the market is ignoring the bank’s strengths and focusing only on its weaknesses.
Brexit is potentially the most considerable headwind the bank faces because, as the largest mortgage lender in the UK, its fortunes are tied to those of the UK economy. A hard Brexit might not lead to the bank’s collapse, but it certainly wouldn’t improve investor sentiment towards the business.
With this being the case, I reckon shares in Lloyds might continue to underperform for some time, at least until the Brexit cloud is lifted.
However, here at the Motley Fool, we like to concentrate on underlying fundamentals, rather than unpredictable market sentiment. And looking at Lloyds’ underlying fundamentals, I think this business is a buy. The firm is well-capitalised, and management is focused on returning cash to investors.
On top of these favourable factors, the shares are changing hands for just 7.7 times forward earnings, which is, in my view, too cheap for a business producing double-digit earnings growth.
Considering all of the above, I’m confident that now is an excellent time to buy shares in Lloyds.
