Britain’s economy faces a period of severe weakness in the short-to-near term. But the subsequent cheapness of UK-focused Lloyds Banking Group‘s (LSE:LLOY) shares is making me sit up and take serious notice.
At 46.7p per share, the FTSE 100 share trades on a price-to-earnings (P/E) ratio of just 6.5 times for 2024. This is a long distance below the index’s forward average of 12 times.
On top of this, the Black Horse Bank packs the sort of dividend yield that suggests it could be a brilliant buy for passive income next year. At 6.8%, this smashes a prospective average of 3.8% for UK blue-chip shares.
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A £1k passive income stream
Of course dividends can never be guaranteed. But based on current City forecasts, if I spent £14,700 on Lloyds shares I could expect to make a second income of around £1,000 in 2024.
Unfortunately I don’t have that sort of cash lying around to invest in the bank. But I could theoretically make this four-figure dividend income by steadily purchasing shares over the next few years.
At the current share price, buying 202 shares a week, or 875 shares a month (worth £409), would net me that annual passive income of £1k within three years.
That’s assuming, of course, that City forecasts for 2024 prove correct, and that shareholder payouts remain at this level through the period.
The good news is that forecasters expect dividends to rise steadily rise through to 2025 at least. So maybe I could hit that £1k passive income target sooner than I’ve suggested.
Should I buy Lloyds shares?
Despite this, I still have big doubts about buying the banking giant today. I believe that the benefit of large dividends from Lloyds could be obliterated by a sinking share price.
The shares have soared of late on expectations of interest rate cuts that would support the UK economy. Such measures could boost loan growth at banking stocks and lower credit impairments.
But I fear that Lloyds’ share price could come crashing back down to earth again. The profits outlook here remains pretty gloomy as the British economy splutters. Indeed, City analysts have been cutting their earnings forecasts of late: they now expect profits to decline 6% in 2024.
Retail banks also face a steady decline in net interest margins (NIMs), or the difference between the interest they pay savers and charge borrowers.
This is already falling at Lloyds (down at 3.08% in quarter three versus 3.14% three months earlier). A blend of BoE rate cuts and intense competition could see it sink over the short-to-medium term.
I think the bank is in great shape to make next year’s expected payment. Its Solvency II capital ratio stood at a healthy 14.3% as of September. But the prospect of prolonged share weakness still makes this a dividend stock I’m keen to avoid.
