Since 2009, Lloyds Banking Group (LSE:LLOY) has typically been described as a penny inventory. That definitely is smart, given the share price has continued to commerce under 100p over the past 15 years. And even in 2024, after having fun with a 20% rally, shares are nonetheless solely buying and selling round 58p.

Nonetheless, regardless of appearances, Lloyds isn’t a penny inventory. Why? As a result of its market capitalisation is £36.6bn. That makes it one of many largest corporations on the London Inventory Trade.

By comparability, penny shares are sometimes comparatively tiny enterprises with market-caps sitting under £100m. They’re additionally notoriously unstable – which doesn’t actually describe this financial institution, given the inventory has hovered across the 50p mark for over a decade.

These traits don’t precisely make penny shares sound all that inviting. But, there’s one factor that these companies have in ample provide that Lloyds has been critically missing – development potential. Given time, a profitable startup can evolve into a brand new business titan, delivering ginormous returns to shareholders who noticed the chance early on.

A shifting panorama

As beforehand highlighted, the Lloyds share price hasn’t precisely been delivering staggering returns of late. Even after taking dividends into consideration, the financial institution has underperformed the FTSE 100 index by fairly a large margin.

There are numerous elements at play contributing to this lacklustre show. Nonetheless, essentially the most important is undoubtedly the collapse of rates of interest. Within the wake of the 2008 monetary disaster, rates of interest have been minimize to close zero p.c to scale back strain on each enterprise and private loans.

Nonetheless, as a consequence, banks like Lloyds have struggled to generate a significant revenue margin by their lending programmes, particularly mortgages. The financial institution’s tried to make up the distinction in quantity. However with British dwelling building targets consistently being missed, there are solely so many mortgages the financial institution can promote.

Now that rates of interest have gone up significantly, Lloyd’s internet curiosity margins are way more beneficial ensuing within the backside line surging. Sadly, price cuts are anticipated to emerge within the close to future now that inflation’s nearly again below management. A return to near-zero charges is unlikely. However looming price cuts nonetheless will begin to reintroduce strain on Lloyd’s revenue margins as soon as extra.

Discovering high quality penny shares

Regardless of the challenges, Lloyds has one trait that the majority penny shares crave – money move. Small companies are sometimes hit the toughest throughout financial downturns merely resulting from an absence of entry to monetary sources. And that’s why when investing in small-caps, I’m all the time attempting to find the companies that have already got a longtime income stream with excessive ranges of money conversion.

Other than defending in opposition to market downturns, money move grants administration groups way more flexibility in capital allocation. And that may be an enormous boon when competing in opposition to different start-ups that function with way more monetary restrictions.

Clearly, being a cash-generative enterprise isn’t the one trait that defines a profitable penny inventory. However as a filter, it may possibly instantly eradicate lacklustre companies from consideration, and helps buyers keep away from falling into traps.

As for Lloyds, its shares proceed to be on the mercy of rates of interest, that are past administration’s management. Personally, I choose investing in companies which might be in additional management of their very own future. Due to this fact, it’s not a inventory I’m tempted to purchase proper now.