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The past five years have been amply rewarding for shareholders in Lloyds Banking Group (LSE: LLOY). During that period, Lloyds’ share price has comfortably more than doubled.
On top of that 150% price gain, it also currently offers a dividend yield of 3.5%. That means investors who got in a few years ago at a lower price could be earning a higher yield from their shareholding.
Why has Lloyds performed so well – and should I buy the share for my portfolio now in the hope of future gains?
A changing environment
One reason for Lloyds’ strong half-decade share price performance is the timing. Five years ago, it remained to be seen what medium-to- long-term impact the pandemic might have on British banks.
Since then, banks including Lloyds have performed better than many investors feared at that time – and that has been reflected in the share price recovery.
It has turned out to be a classic example of Warren Buffett’s aphorism about being greedy when others are fearful and fearful when others are greedy.
Solidly profitable performance
Another factor that has helped Lloyds during that period is its solid business performance. It has kept a lid on loan defaults. As the nation’s biggest mortgage lender, that mattes a lot. Any big jump in default rates could eat badly into profits.
Lloyds has been able to benefit from its strengths: economies of scale, well-known brands, a customer base in the tens of millions and a domestic focus that helps shield it to some extent from economic uncertainty in other markets.
Here’s my concern
Still, while there is a lot to like about Lloyds, I have chosen not to buy its shares for now. Management’s ambivalence towards the dividend did not sit well with me.
Like other banks, Lloyds was required to suspend its dividend during the pandemic. But its slowness in bringing it back made me feel the banking group’s leadership did not prioritise shareholder payouts, despite massive profitability. Only this year did the interim dividend finally surpass its pre-pandemic level.
My larger concern about Lloyds – and, come to that, its competitors – has been the outlook for banks more generally. The UK economy has felt weak in recent years. There is a high level of global economic uncertainty and that risks weakening property markets, including in the UK.
That risks leading to a sharp increase in loan defaults. Given Lloyds’ large mortgage book, that could be bad news for earnings at the bank – and its share price.
Not ready to invest
So far, fortunately for the economy and borrowers, that has not happened.
But has the risk gone away?
I do not think so – and that scares me.
So although I have missed some great years in which Lloyds’ share price has soared, I remain unwilling to invest for now.
Given the bank’s strong competitive position, massive profitability and manageable level of defaults, I think its share price could potentially move up from here. But investing is about weighing potential risks and rewards.
The risk of a weaker economy eating into loan quality and driving up defaults continues to concern me. So I have no plans to buy Lloyds’ shares at the moment.
