Is Lloyds Banking Group a bargain in the FTSE 100, with the share price sitting at around 59p?

It can’t be denied Lloyds Banking Group (LSE: LLOY) has been popular with private investors in the UK and has performed well so far in 2024.

However, most are probably attracted by the large dividend on offer. With shares trading around 59p, the projected yield for 2025 is a solid 5.8%. At first glance, this income stream would fit well into my portfolio.

The return journey for dividends

However, the projected payout to shareholders for 2025 is in line with 2019 levels. But that’s despite five years of impressive double-digit percentage dividend increases since 2020. So what went wrong?

The problem is that Lloyds directors took an axe to shareholder payouts when coronavirus hit. In fairness, the Prudential Regulation Authority (PRA) asked boards of major British banks to suspend dividends and share buybacks in 2020.

Covid 19 was scary and full of unknown consequences, and regulators were scarred by the dramatic financial collapse in the banking sector in 2007/08. So they didn’t want to take any risks.

So far, so understandable. But Lloyds did not fully restore dividends soon after lockdowns were eased. Instead, directors took the opportunity to cut the underlying payout.

The move speaks volumes about their view of how vulnerable Lloyds’ business is to the broader cyclicality of the banking sector. Banking businesses can suffer greatly when the economy weakens, leading to sharp declines in profits, cash flow, share prices and dividends.

Cyclically challenged

In fact, cyclicality is the biggest risk with Lloyds shares as I see it. The company has been posting strong profits for several years, but that is unlikely to last forever. At some point, there will likely be a downturn as the cycle goes through its usual multi-year swings. If and when that happens, it will be easy to lose money on Lloyds shares.

But Lloyds could go higher still. Profits could rise and the dividend could increase in the coming years. If we see a sustained period of growth and prosperity for the UK economy, Lloyds shareholders could do well in the coming years, whether they invest for income, growth or both.

However, cyclical risk is a good reason for the stock market to keep valuations low. After all, how else could the market try to factor in all the increased uncertainty in such a cyclically sensitive business?

For this reason, I don’t see Lloyds as a FTSE 100 bargain. I think the price is fair, despite its single-digit price-to-earnings ratio and high dividend yield.

Regardless, I understand why investors are interested in these stocks. But if I were to hold them, instead of treating them as an income play, I would treat them primarily as a cyclical investment. That means keeping them on a tight leash with one hand on the ejection seat, ready to go at the first sign of trouble!