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3 reasons I’d ignore the Lloyds share price and buy other cheap UK shares for my ISA

Published 16/10/2020, 07:08
Updated 16/10/2020, 07:10
3 reasons I’d ignore the Lloyds share price and buy other cheap UK shares for my ISA

Is it finally time to pay serious attention to the Lloyds (LSE:LLOY) share price?

The FTSE 100 bank has bounced off the multi-year lows it hit last month, leading to hope that the worst could be over for the embattled bank. Yet it could be argued that Lloyds is a UK share that still looks extraordinarily cheap. City analysts predict that the bank’s annual earnings will rebound more than 230% in 2021. This leaves it trading on a bargain-basement price-to-earnings (P/E) ratio of 8 times for next year.

But this is not all, as brokers expect the Prudential (LON:PRU) Regulation Authority to lift its dividend embargo sometime over the next 12 months. And this means Lloyds sports a monster 5.5% dividend yield for next year.

3 big risks I won’t dispute that Lloyds’s earnings multiple makes it extremely cheap on paper. But we trade shares in the real world and not in two dimensions. I still believe the FTSE 100 firm carries too much risk today. And the cheap Lloyds share price reflects its status as a high-risk investment.

There are several major reasons why I reckon the Lloyds share price could sink again, including:

  • A long Covid-19 hangover for the UK economy. It’s difficult to predict the long-term consequences of the coronavirus crisis for the domestic economy as infection rates continue to spike. It’s clear, though, that they will be colossal and take a number of years to settle down. Things could get even worse should the government bite the bullet and impose a strict ‘circuit breaker’ lockdown lasting a number of weeks. One government source has put the chances of this happening at around 80%, according to The Daily Telegraph.
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  • A hard Brexit. With just 10 weeks or so left until the end of the Brexit transition period, negotiators aren’t giving themselves a lot of time to sign off on a trade deal. The cost of failure on this front will be colossal and a significant blow to UK-focussed cyclical shares like Lloyds. The OECD predicts that a failure to ink a deal would lower British GDP by 6.5% over the next few years.
  • Interest rates falling further. Low interest rates have seriously dented profits at Lloyds since the Bank of England launched ultra-loose monetary policy during the 2008 financial crisis. The Covid-19 crisis has made things even worse as it’s prompted the bank to cut rates again to fresh record lows. And Lloyds’s troubles will get even worse should Threadneedle Street, as many expect, move to negative interest rates.

    • The post 3 reasons I’d ignore the Lloyds share price and buy other cheap UK shares for my ISA appeared first on The Motley Fool UK.

    Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group (LON:LLOY). 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.

    Motley Fool UK 2020

    First published on The Motley Fool

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