Lloyds Banking Group (LSE:LLOY) shares have had an impressive few years. At around 102p, the stock is 127.82% higher than it was five years ago.
That’s the kind of move that gets people asking whether there’s more to come. My answer, for what it’s worth, is that this looks like a stock where the easy money has been made – for now.
A cyclical high?
Lloyds shares trade at a price-to-earnings ratio of about 13.5, with a dividend yield of around 3.57%. Neither number looks expensive in isolation.
Those numbers, however, can be misleading. Banks are cyclical businesses and P/E ratios can sometimes look lower when they are near the top of the cycle.
Lloyds makes most of its money from the margin between what it pays savers and what it charges borrowers. Higher rates have helped widen that profitability gap.
The Bank of England, however has recently voted 7-2 to hold rates at 3.75%. Two members voted for an increase, with inflation still top of mind.
That’s not necessarily a bad thing in the short term. But it means Lloyds can’t easily expand its margins by cutting interest rates on savings products while mortgages remain fixed.
Property market challenges
The UK’s housing market has also been struggling recently. And it’s not just builders like Persimmon and Taylor Wimpey that are feeling the pressure.
Lloyds is the UK’s largest mortgage lender. So a housing market where demand is slowing is also a challenge for the bank in terms of its loan book.
Nationwide data shows annual house price growth slowing to 1.7% in May. That’s below inflation and lower than the previous month.
In fact, prices actually fell month on month. That’s not a disaster for Lloyds, but it’s a real issue for investors to keep an eye on.
None of this stopped chief executive Charlie Nunn saying Lloyds is “confident in our delivery for the year ahead” in the Q1 update. Fair enough, but I’m looking further ahead than that.
Should I buy?
I’m not convinced this is the moment to be thinking about buying Lloyds shares. I missed it five years ago when it was cheap and that looks like a mistake.
Buying now, however, with the stock near a 12-month high, rate cuts delayed, and a weak housing market doesn’t seem to fix that. To me, it looks more like making it worse.
In Warren Buffett terms, having failed to be greedy when others were fearful, I’m now looking to be fearful when others are greedy. That seems to be the right move to me.
The good news for me, though, is that cycles turn. I’m confident that there’ll be a better entry point than this one – I just need to be ready for it when it comes.
Should you invest £5,000 in Lloyds Banking Group Plc right now?
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Stephen Wright does not own shares in any of the companies mentioned.
