The plunging course of Lloyds action
At the time, the stock was at 45p. Today is around 30p, as I write. And this new dive of over 30% makes all the difference. In March, the share price was already more than 30% lower than at the start of the year. Today, the drop since early January is more than 50%. If you are looking to buy Lloyds stock, I would say this is an encouraging decision.
And there was more news from the company on April 1. The directors of Lloyds said in the update that they had decided to stop paying dividends to shareholders and buying back shares. This came after the Prudential Regulation Authority (PRA) encouraged banks to preserve their capital due to the coronavirus pandemic.
There will therefore be no final dividend for 2019 and no quarterly or interim dividend in 2020. We will have to wait until the end of this year before the directors ” decide on dividend policy and amounts. “ And I read this statement to mean that there is no certainty that dividends will start again.
Indeed, the recession that followed the foreclosure of the coronavirus could be grim. And we can see the absence of dividends from Lloyds for a considerable time because of this. But as a potential new shareholder of Lloyds shares, I welcome the news of the suspension of dividends.
Of course, the news is disastrous for existing shareholders who have now experienced the double blow of a share price collapse and the end of dividend payments. So why do I consider the dividend decline as a positive indicator?
How I aimed to make an investment work
I don’t see Lloyds as an investment for growth or income. For me, it’s a cyclical title. I think the banking sector is one of the most cyclical sectors in the market. And that’s why the Lloyds share price is reacting so much to the current crisis.
For many years, the course of its action has oscillated a lot from top to bottom and has evolved essentially laterally. This may seem confusing, as profits improve most of the time and the dividend gradually increases. Indeed, many observers have done a lot on the enticing value indicators that Lloyds displays, such as high dividend yield and low asset value.
But valuation is “supposed” to appear low as profits increase. The market “knows” that cyclical troughs follow peaks. And the only way to offset the risk ahead was to nibble on the downward valuation. And that’s why I’ve been commenting on the downside risk for years.
For me, valuation indicators work backwards with extreme cyclical values like Lloyds. So the stock looks more attractive to me now, the stock price is close to its previous lows and the dividends have stopped for the moment.
I’m not yet a complete bull on Lloyds, but I’m starting to watch it closely!
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Kevin Godbold has no position in the actions mentioned. The Motley Fool UK recommended Lloyds Banking Group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that taking into account a diverse range of ideas makes us better investors.