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Lloyds’ share price: the best value stock on the FTSE 100?

Lloyd’s’ share price has tumbled 25% since hitting a high in April. Weighing on the stock is Brexit and wider economic conditions. But for bargain hunting investors a combination of a low valuation and hefty dividend might make it a long-term bet worth taking.

 

How’s the share price performing?

So far this year Lloyds’ [LLOY] share price is down 2.4%, lagging behind the FTSE 100’s 5.3% gains. Lloyds investors can at least console themselves with the notion that stock is at least outperforming industry peers, with Barclays [BARC] down 10.2% this year, and RBS [RBS] falling a significant 15.5%.

Since Lloyds’ underwhelming half year results on 31 July, its share price has fallen 6.26%. In the results, the bank reported a worse-than-expected 7% dip in profits compared to the same period last year. Lloyds also set aside an additional £550 million provision for PPI claims. 

However, momentum has somewhat returned to Lloyds with the stock up 2.7% in the past two weeks, a decent short-term gain but traders should consider other technical indicators to establish a fair valuation, for instance, a 14-day RSI of 79 could point to the shares approaching overbought levels.

 

Why is Lloyds’ share price good value?

Despite the underwhelming results, or perhaps because of them, Lloyds could represent good value for investors right now. Shares offer an attractive entry point due to the depressed valuation, and a decent return relative to industry peers.

The stock carries a single digit P/E multiple of 9.31x (TTM) and a price-to-book ratio of 0.7, the latter rendering shares undervalued, relative to the company’s net assets. And despite RBS’s price-to-book ratio of 0.5, the rival’s stock carries a 26.81x P/E, a significant premium on the Lloyds price. Barclays is perhaps the most overvalued of the lot, relative to earnings at least, shares carry a 58.66x P/E ratio, despite a book value of just 0.33, according to YCharts. 

Lloyds’ leadership is also making effective use of investor money. Under CEO António Horta-Osório, the bank has undergone a program of cost efficiencies that has protected profits even as the wider economy has faltered.

This has seen Lloyds’ return on equity come in at 8.83%. While this might not be the highest on the FTSE 100, it edges out its rivals. Barclays shares carry a 5.80% RoE, while RBS’s return comes in at 7.46%.

 

Market cap £34.66bn
PE ratio (TTM) 9.32
EPS (TTM) 5.30
Profit margin 24.81%

Lloyds share price vitals, Yahoo finance, 28 August 2019

 

What’s weighing on the share price?

While Lloyds has remained a profitable business, there are headwinds. In the half-year results, Lloyds saw a reduction in revenues and an increase in bad loans. The bank is also heavily UK focussed, which presents a problem if the UK economy falls off a cliff post Brexit.  

In this scenario, analysts at Barclays have predicted that The Bank of England will slash interest rates by 50 basis points next year. Such a deep cut to interest rates would hurt Lloyds’ profitability.

50

Number of basis points Barclays analysts predict the BoE will slash interest rates by

On this, Boris Johnson’s first meeting with EU leaders at the G7 summit saw the two sides unwilling to budge on their respective negotiating positions. This has only served to increase the possibility of a no-deal Brexit.

Then there is the prospect of recession in Germany, Europe’s biggest economy. If the UK follows suit then the combination of Brexit and economic contraction will eat into Lloyds’ profits, no matter how good the bank is at keeping costs down.

 

Is Lloyds a buy?

Despite the headwinds analysts seem optimistic. The consensus rating is “Buy” with an average 75.37p price target. Hitting this would represent a 53% upside.

53%

Upside on LLOY shares if consensus price target is hit

Lloyds also carries one of the best dividends on the FTSE 100. In the half-year results, investors received a 1.2p interim dividend payment, up 5% from the 2018 interim payout. 

For bargain hunting investors willing to hold the stock for the mid- to long-term, Lloyds could well be worth picking up to take advantage of such a low valuation.

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