Lloyds Bank (LSE: LLOY) had a hard 2020, to be sure. But the Lloyds share price has come a long way from its lowest point. It has doubled, in fact.
Why the Lloyds share price could underwhelm
There is much to like about Lloyds Bank as a company. It is one of the UK’s largest banks, with a long legacy. The bank has recovered from more than one downturn. It is profitable even at a time when interest rates are low and retail banking is its biggest income generating segment.
But there are challenges to it as well. Being UK-centred is great when the economy is booming, but a recession here would impact Lloyds Bank more. Peers like HSBC would be more protected because they are geographically diversified. Brexit is likely to impact it more too.
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Moreover, Lloyds dividends are capped by the banking regulator for now. As a result, it has a low dividend yield of 1.3%. While this is a temporary restriction, I reckon it is holding the Lloyds share price back. Pre-pandemic, a high dividend yield made it an attractive stock.
I think it is because of these reasons, and the fact that the UK is still partly in lockdown, that the Lloyds share price is held back even now. At its last close of 43p, the share was 27% below the levels where it started 2020.
Will it come back to those levels? It could, but I am not holding my breath. If past trends are anything to go by, the Lloyds share price is unlikely to grow consistently.
What I’d do now
Much as I want to get behind the stock, purely because the bank has strong credentials, I would like to see its performance post-pandemic for longer before making a call.
In the meantime, I will focus on fast growing stocks that have far more predictable share price trends. Or at least are less pricey than the Lloyds share, which has a price-to-earnings (P/E) ratio of over 35 times right now.
FTSE 100 stocks I like
FTSE 100 stocks like Spirax-Sarco Engineering and Halma, the provider of technology solutions for safety, are two examples of companies that have seen broadly rising share prices.
Both of them are ahead on the key metric I am tracking right now to assess established companies’ financial health right now – profits. They reported profits in 2020, despite the year being what it was. In my view, this positions them well for a year when growth will return. However, they have higher earnings ratios, than Lloyds, which needs to be kept in mind.
I also like FTSE 100 miners, all of which have consistently lower earnings ratios than Lloyds Bank. Among these, I like Rio Tinto right now, which has come off its highs. Others like Glencore and Anglo American, on the other hand, are touching multi-year highs at present.
One catch to miners is that their rally is being driven by huge public spending, primarily from China. If that were to slow down, their fortunes could turn. But whether that will happen is a matter of some debate.
