Should I buy the Lloyds share price after its 5% drop on today’s results?

G A Chester discusses the latest results from Lloyds Banking Group plc (LON:LLOY), and the near- and longer-term outlook for investors.

| 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.

Lloyds (LSE: LLOY) released its latest half-year results this morning. They come at a time when the long shadow of PPI mis-selling claims is finally set to pass (29 August), but to be replaced by the rapidly-approaching dark clouds of Brexit and a potential UK recession.

Here, I’ll look at how Lloyds performed in the six months of the year, the near- and longer-term outlook for the business, and whether I’d buy or avoid the shares.

Shares down on results

The rate of consumer credit growth has been sliding in recent months, and Lloyds reported a 2% decline in net income for H1. More positively, operating costs were 3% lower, and total costs down 5%.

However, pre-tax profit of £2.9bn (down 7%) was weaker than expected, partly due to a higher PPI provision. A Q2 provision of £550m took the first-half total to £650m, compared with £200m in the same period last year. Shareholders can only be thankful this saga will soon be over.

There was another negative though, that could become an increasing drag if the economy is turning down. The first half saw a 27% increase in loan impairments to £579m from £456m. Most of the damage was done by the retail banking divisions of unsecured lending and motor finance (areas to which Lloyds has ramped up exposure in recent years). Two individual corporate names also ensured commercial banking contributed negatively to impairments.

Chief executive António Horta-Osório described the financial performance as “good,” highlighting the bank’s “market leading efficiency and returns,” as well as continuing “strong strategic progress.” Despite this, and the announcement of a 5% increase in the interim dividend, the shares fell as much as 5.4% in early trading.

Near- and longer-term outlook

Horta-Osório noted that “economic uncertainty has led to some softening in business confidence as well as in international economic indicators.” However, he reckons the resilience of the group’s business model will enable it to maintain the first-half net interest margin of 2.9% for the full year. He also expects the cost/income ratio to improve, with operating costs falling to below £8bn from £8.2bn last year.

Looking beyond 2019, he said: “Longer term targets remain unchanged although continued economic uncertainty could impact outlook.” If its longer-term targets are realised, shareholders should be able to look forward to sustained earnings and dividend growth.

However, we have the risk of “economic uncertainty” impacting the outlook, and then there’s the risk of an actual full-blown economic recession, perhaps catalysed by a no-deal Brexit. The recent fiscal risks report from the Office for Budget Responsibility, which includes a fiscal stress test for such a Brexit, makes for grim reading. And it’s not even a worst-case scenario.

A bet on an orderly Brexit

Lloyds today reported tangible net asset value (TNAV) per share of 53p, while the share price is at a tad of a discount at 52.7p, as I’m writing. The forward price-to-earnings (P/E) ratio is 6.9 and the prospective dividend yield is 6.5%.

I see Lloyds as very much a bet on an orderly Brexit, against which is the risk of a no-deal departure and recession, with Lloyds’ TNAV, earnings, dividend and share price all heading deeply south. Some may see this as a good risk-reward proposition, but it doesn’t appeal to me, and I’ll continue to avoid Lloyds at this stage.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »