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I bought Lloyds Banking Group (LSE: LLOY) shares some time after the great 2008 financial crash, just as many other investors did. And we all waited patiently while we watched our investments going nowhere for years. And it seemed like the undervaluation that we all thought we saw might have been simply a mirage.
But Lloyds has finally come good, and every £1,000 invested this time five years ago is now worth £2,510 (give or take a few pounds). So is it time to bail out and invest the profits somewhere else? There’s definitely a bearish feeling developing among some of the City experts…
Sell rating reiteration
One analyst even thinks we should dump Lloyds shares. At the end of April, Shore Capital reiterated its Sell recommendation, with a 91p price target. At the time of writing, that’s 17% down on the current price. What was the reasoning?
The investment bank described Lloyds’ first-quarter performance as strong, but suggested the share price already reflected it. And it pointed to the fact that Lloyds’ shares were trading at around 1.7 times net asset value.
By the end of the first-half, reported on 30 July, that figure had risen to 1.9 times — even when adjusted for the effects of the bank’s ongoing share buyback.
On that basis though, NatWest is valued roughly the same. So maybe Lloyds isn’t too pricey. Barclays‘ shares however, are priced at only 1.2 times net assets. But that probably reflects some of the greater risk coming from international and corporate banking exposure.
Performance just fine
None of the bearish feelings I can find appear to be based on any suggestion that Lloyds is performing poorly. In fact, most analysts agree Lloyds is currently doing rather well.
There are just some fears that today’s superior profitability might wobble in the future. And I definitely share that thought. Over the next year or two, I see a real possibility that Lloyds’ shares could head down a bit rather than up.
And I haven’t yet mentioned the car loan mis-selling thing. That, some commentators suggest, could drag out as far as 2028 before it concludes. So that’s another uncertainty.
What should we do?
Despite these risks, a comfortable majority of brokers still have Lloyds as a Buy. But what investors do, I think, should be based on individual goals for the stock.
Personally, I’m in Lloyds’ shares for the dividends. I see a very good chance of them keeping going for many years ahead. And if I’m not planning to sell, I see no reason to care much for month-to-month, or year-to-year, share price movements — unless they get too wild.
I reckon other investors who concentrate more on the share price however, could do well to consider shares with wider valuation safety margins.
I might buy more Lloyds’ shares in the future, but not now. That’s mainly because I want to focus on diversification. And I have my eye on a some other income candidates to help me achieve that…
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Alan Oscroft owns shares in Lloyds Banking Group.
This story originally appeared on Motley Fool
