This bank is paying investors to wait for better times

Questor share tip: despite interest rates soaring, Lloyds' share price performance has been sluggish

One of the biggest banking names on the UK high street, Lloyds has millions of customers trusting it with their money and as a source of borrowing. 

In this context, it is no surprise the bank has been one of the most popular shares in Isas and pensions for decades.

However, the fact its share price is still below pre-Covid levels implies investors need to think differently about the role of Lloyds in their portfolio.

It is fair to suggest the sluggish share price performance is down to the mixed outlook for earnings.

In theory, the sharp rise in interest rates should have supercharged profits for the banking sector.

However, this year’s profit forecast for Lloyds is exactly the same as what it achieved in 2019 when interest rates were significantly lower than today. The analyst forecast is £7.5bn underlying pre-tax profit in 2023, falling to £7.3bn in 2024.

Yes, that is a lot of money but a cynic might suggest the black horse has been sleeping in the stable rather than running through the meadow. Investors want profit progression.

Four years ago, Lloyds’ shares were trading around 50p versus 45p today. Dividends were higher back then (3.37p per share in 2019), compared with 2.78p per share expected this year. If it were not for the big dividends then investors would have bolted long ago.

So, what now? Investors need to give up on the idea they will make capital gains with the stock in the current environment. The shares trade on one-time tangible net assets – in a bull market for equities that is likely to be the floor, but it could also be the ceiling for Lloyds’ valuation heading into a potential recession.

That the bank’s impairment charge for potential bad loans in the second quarter hit £419m versus £200m a year earlier suggests Lloyds is preparing itself for a tougher future. 

The figure was a shock given analysts had forecast £371m in impairments for the quarter. Higher interest rates put more pressure on consumers and businesses and the consequences are still playing out.

The prospect of a recession or slow economic growth means that Lloyds’ investors will have no choice but to focus on dividends, forecast to grow to 3.12p in 2024 and 3.52p in 2025. The latter implies a 7.8% yield on the current share price. Put simply, Lloyds is paying investors to wait for better times.

Lloyds Banking Group is owner of The Telegraph. It has no involvement in editorial matters.

Questor says: hold

Ticker: LLOY

Share price at close: 44.94p

Update: Shanta Gold

Investing in gold miners is fraught with danger, particularly when a company starts a new mining operation. It is normal to have teething problems at launch and for the processing plant and other equipment to need fine-tuning.

Shanta Gold’s latest update could have been make or break for the share price. Having poured first gold from its Singida project in Tanzania on March 30, the subsequent few months were always going to have been a sensitive period for the new mine.

While Shanta issued a reassuring statement on 1 June that Singida had reached commercial production status and it implied everything was working, the market had to wait until July 20 for proper insight into its performance.

The second quarter update knocked the market for six, sending the share price up 10pc in a day.

Singida’s launch had gone better than anyone expected, with gold production 19pc ahead of company forecasts for the three-month period.

Shareholders needed that good news as there has been more drama with Shanta as an investment in recent years than an episode of Eastenders.

The share price sank in June on reports and then confirmation that major shareholder Odey Asset Management had dumped the bulk of its holding in the gold miner. Allegations of improper conduct by Crispin Odey led to the asset management firm he founded having to liquidate holdings to raise cash to meet client redemptions.

Two years ago, Shanta’s shares took a hit after it drastically reduced production guidance after lower-than-expected gold grades at its New Luika mine in Tanzania. Last year there was euphoria around takeover interest for the miner, which came to nothing. The gold price has also been up and down like a yo-yo over the past three years.

These events are reminders that investing in gold miners is not for the faint-hearted. However, for those eager to stay the course, Shanta’s latest news provides reassurance.

Having two operating mines means it now has multiple sources of revenue. The company also has growing confidence in its West Kenya exploration project which could potentially become its third money-maker, although significantly more analysis must be conducted by Shanta before a development decision can be made.


Dan Coatsworth is a stock market analyst at AJ Bell

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