September 25, 2020

6 reasons why I’d avoid the Lloyds share price! I’d rather buy cheap UK shares today

Are there any less-attractive UK shares for investors to go fishing for than Lloyds Banking Group (LSE: LLOY)? I’m of the opinion there are very few. In fact, I reckon the FTSE 100 bank could end up costing you a fortune.

First and foremost, it’s worth remembering Lloyds doesn’t seem that compelling at current prices. Many UK shares are trading at historic lows, and plenty currently change hands at their cheapest since the 2008/2009 financial crisis. There are ample opportunities then for eagle-eyed investors to buy in at these cheap levels. And then get rich over the long run as confidence gradually flows back into share markets.

But Lloyds’ share price was tanking long before the Covid-19 crisis emerged. It’s fallen exactly two-thirds in value since the autumn of 2015. And trading conditions threaten to be much worse than they did during the latter half of the last decade.

Lloyds faces the prospect of a long road back for the UK economy and the prospect of more profits-damaging rate cutting by the Bank of England.

Arrow descending on a graph portraying stock market crash

Rate-gate

Threadneedle Street has been floating the idea of more interest rate reductions of late, possibly even introducing negative rates before long. And some believe that more action could be coming sooner rather than later.

Jasper Lawler of London Capital Group notes: “There is a growing consensus that the Bank of England will act again at its November meeting,” with policymakers likely to be prompted by the end of the government furlough scheme next month and the rising chance of a no-deal Brexit.

Besides, the Lloyds share price looks quite expensive on paper right now. A forward price-to-earnings (P/E) ratio of 28 times sails above the historical FTSE 100 average of 15 times. Now, expectations of a 200-plus-percent earnings jump next year pushes this UK share’s multiple back below the bargain-basement level of 10 times. However, the chances of such a stunning rebound are slim-to-none, in my opinion.

Forget about Lloyds!

So, Lloyds offers very little in the way of value or growth for investors. It also provides little for UK share investors to get excited about on the dividend front too. Britain’s banks were forced to cancel dividends earlier this year on instruction from the Prudential Regulation Authority (PRA).

Signs of a second wave of Covid-19 cases — and its impact on the domestic economy — suggest a policy reversal will be some way off. But even if the PRA does an about turn, the state of Lloyds’ balance sheet, allied with its muddy profits picture, means that this FTSE 100 bank is unlikely to start shelling out dividends again any time soon.

Why take a gamble with the Lloyds share price then, when there are so many dirt-cheap UK shares to choose from today?

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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