Owning Lloyds shares has been a long-term disaster. What now?

As an investor, I like to buy stocks and get good returns from holding them in the long run. However, the investment Lloyds (LSE: LLOY) over the past few years is going to be tough. The bank’s share price is within 1% of where it was a year ago even after a strong rally. It is 23% lower than the level of five years ago. Looking back on the financial crisis, Lloyds shares are today trading at almost six times their 2007 high.

Even more, it looks worse! Lloyds’ share price peaked at £5 in 1998. It has recently flirted with 50p, close to a tenth of its value a quarter of a century ago.

Are there any changes that might persuade me that buying Lloyds today might be a good move for me as an investor?

Growth or income

One thing to consider is the dividend.

While the numbers above focus on share price movements, dividends have been a source of income for Lloyds shareholders for some of the past quarter of a century. Currently, for example, the return on Lloyds shares is 4.1%. This year’s interim dividend is up 12% compared to last year.

However, Lloyds suspended its dividend during the pandemic (due to regulatory requirements). It still hasn’t returned to its previous size, despite last year’s huge profit which enabled it to buy back £2bn of shares.

It was the same story during the financial crisis.

After 2008, dividends are suspended until 2015. No dividends are guaranteed. But Lloyds has proven to be more reliable over the long term when it comes to dividend consistency, compared to companies like Spirax-Sarco or Diageowhich has raised the payment every year for decades through thick and thin.

Interesting evaluation

One result of the long-term decline in Lloyds shares is that the valuation has looked more attractive.

The current price-to-earnings ratio is just nine. It is common to calculate bank stocks using an alternative measure of the price-to-book ratio. On that basis, too, I Share Lloyds now looks attractively priced as a potential addition to my portfolio. Past performance is no guide to future performance. Just because Lloyds’ share price has taken a long-term decline doesn’t mean the same thing will happen in the future.

Lloyds continues to do excellent business, as its profits show. It benefits from a well-known brand, a large customer base, and demand for financial services in the UK. UK banks including Lloyds now have a more robust approach to risk management than before the financial crisis.

The environment is tough

But that valuation metric is based on current earnings and book value.

If a recession leads to a sharp rise in loan defaults, a bank’s earnings and book value could drop significantly. The bank said defaults remained at a low level. But post-tax profits for the first nine months of last year fell 24% compared to the previous year’s period. I’m afraid something worse could happen from here.

That risk – from a bad economy leading to defaults and damaging profits – is enough to keep investing in banks today. I have no plans to nibble, despite the current Lloyds share price.