It’s been a long time coming, but the Lloyds Banking Group (LSE: LLOY) share price has finally sprung back into life, giving its shareholders hope it might finally be entering recovery mode.
Forget about Brexit, the market seems to be saying the FTSE 100 firm is a great buy at this time, its share price rising 11% in a little over three weeks. There’s no doubt that Lloyds’s ultra-low valuation, a forward P/E ratio of 7.8 times, has attracted investor attention, as has its gigantic 6.1% dividend yield.
But I see Lloyds’s share price as a classic value trap. City brokers expect earnings at the bank to flatline in 2019, a reading that’s in danger of swingeing downgrades (along with 2020’s tentative forecasted recovery) in the months ahead, and particularly so should the UK embark on a catastrophic Brexit journey.
Simply put, if the UK economy struggles then so does Lloyds. It’s an institution which has no tangible exposure to foreign climes to mitigate troubles at home. So forecasts from IHS Markit that the economy grew just 0.1% in the fourth quarter don’t bode well for the medium term, exacerbating fears that the country is entering a long spell of sustained weakness.
Fragile China
One way that investors have sought to cut their exposure to Britain is by buying into the commodities space, a traditional safe-haven in troubled times. However, I’d be happy to avoid the likes of BHP Group (LSE: BHP) as the Chinese economy rapidly cools.
Concerns over slowing activity in the Asian powerhouse are hardly anything new, but the rate of cooling has taken the market by surprise. Indeed, China’s National Bureau of Statistics reported this week that GDP growth slowed to 6.4% in the final quarter of 2018, the worst result for almost three decades.
There’s no doubt that tense trade discussions between the US and China have damaged the country’s economy, a problem that threatens to keep rumbling on despite a recent thawing of rhetoric between lawmakers on both sides. In this scenario, demand for commodities like iron ore is likely to slide, and add to concerns of huge oversupply in many key raw materials markets.
For this reason, I’m happy to look past BHP, its low prospective P/E multiple of 11 times and 9.6% yield, and invest elsewhere on the Footsie.
Another investor trap
One blue-chip share that I won’t be buying is British American Tobacco (LSE: BATS), though.
It may have been the biggest dividend payer in Britain last year, but increasing regulation on cigarettes makes me shudder when considering just where the business could be in a decade’s time. In a symbolic move that neatly encapsulates the tobacco titans’s struggles, legislators in the former industry stronghold of Virginia are talking about raising the minimum age for buying cigarettes and e-cigarettes to 21.
These discussions also signal the rising hostility towards Big Tobacco’s next generation products, like vaporisers, once viewed as the saviour of the industry as demand for combustible products fall. With its long-term earnings outlook still darkening I’m happy to look past British American Tobacco’s undemanding forward P/E rating of 8.1 times and its 8.2% dividend yield and look elsewhere for great dividend shares.
