Having fallen 14% since 27 July, Lloyds Banking Group (LSE: LLOY) shares have now plunged to their lowest price since 2013, trading at just 48.5p as I write. Based on current full-year forecasts, that puts Lloyds on a forward P/E multiple of seven — half of the FTSE 100‘s long-term average of around 14.
But then, it’s only a few months since my latest fat dividend from Lloyds turned up in my SIPP, and I’ve been enjoying regular big dividends since I bought the shares. A combination of Lloyds’ progressive dividend policy and the share price slump has now pushed the forecast yield to 7%.
Contradiction?
So how do we square the plunging share price with the growing dividends? It all stems from the bank’s first-half report released at the beginning of August, after it missed first-half pre-tax profit expectations by a significant margin. With Lloyds having refocused itself as a UK retail bank, its fortunes are, as chief executive António Horta-Osório said, tightly bound to the UK economy.
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With a no-deal Brexit looking ever more likely, and with talk of a looming recession, fears are growing that Lloyds’ profits could tank and the dividend could be cut.
When people are getting gloomy and are fearing the worst, and when share prices are falling due to economic uncertainty, that’s when safety-conscious investors sell and run for the hills. But I reckon that’s precisely the wrong approach, and I think we could be heading towards the best time to buy shares since the banking crisis.
Yes, the dividend could be cut and Lloyds shares could well fall further. But if that happens, I’ll be seriously considering a top-up.
Challenger
While I’m still in the buying phase of my investments, another bank that’s been creeping up my watch list is Bank of Georgia (LSE: BGEO).
One of the biggest lenders in Georgia, a country on the edge of the ex-Soviet Union, the bank has just released some impressive first-half figures with bottom-line profit coming in 36.9% ahead of the first half of 2018.
Over the past 12 months, the bank has seen customer lending growing by 30.5%. Chief executive Archil Gachechiladze told us that “Georgia’s economic performance remained strong in 2Q19 with an estimated 4.9% growth, rising reserves and improved external balance,” and that seems like a distant dream for those of us in Brexit-torn Britain.
Dividends
Forecast dividends stand at around 6%, more than three times covered by earnings. Despite that, income-seekers are not flocking to buy the shares, which languish on a forward P/E of only 5.3. I think there are several reasons for that.
One is that Georgia’s economy is closely tied to that of Russia, and Russia isn’t exactly on glowing terms with some of its neighbouring states. So there have to be concerns about political stability in the region.
Markets have a big downer on banks in general too, and I can’t help feeling that institutional investors see banks in these states as being higher risk. But I think that’s a mistake, and I reckon Bank of Georgia could have a far more profitable decade ahead of it than the UK’s big banks.
