Stock Deconstruction

Lloyds share price: what’s behind the FTSE 100’s most traded stock?

The Lloyds share price might have shot up over 11% since the start of 2019, but it has dropped 13% since the middle of April.

Brexit, regulatory fines, including a whopping £58 million slap on the wrists over the HBOS fiasco, and a downturn in mortgage sales have all hurt. Still, it remains the FTSE 100’s most traded stock, with an average volume of 159 million shares trading hands over a 30-day period.

Compared to other British banks, Lloyds [LLOY] has weathered the current malaise in the UK economy better than most. The share price's double digit gains dwarf RBS's meagre 2.49% and Barclay's flat 1.22%.

One reason for the relatively strong performance is Lloyds’s ability to protect its margins in a hostile trading environment. Operating margins of 34.50% reflect well on a bank that has withstood the wider economic headwinds better than others. Underlying profits are also up, climbing to £8.1 billion in 2018, a sharp 6% rise on 2017. 

 

What’s behind the Lloyds share price?

Monster dividend

Lloyds carries a 5.66% forward dividend yield, beating out RBS's 3.15% and HSBC's 4.69%. The share price also has a near 96% payout ratio. This kind of performance has few equals among the rest of the FTSE 100, let alone other UK banks.

In more good news for shareholders, Morgan Stanley expects a £2.5 billion share buyback to come before the end of the year, driving total yield on the stock to 12%.

 

Market cap£40.89bn
PE ratio (TTM)10.53
EPS (TTM)5.50
Return on equity (TTM)9.00%
Quarterly earnings growth (YoY)2.50%
Profit margin24.62%

Lloyds share price vitals, Yahoo finance, 09 July 2019

 

Strong margins

With the current Brexit-triggered economic uncertainty, Lloyds has been proactive in protecting its margins. One way it has done this is to move savers onto lower interest rate current accounts. This has helped the bank reduce the interest it pays on these accounts by 62%.

These tactics saw Lloyds’s net interest margin come in at 2.91% in its Q1 results, a drop of just 1 basis point from the previous quarter. Rivals Barclays [BARC] and Royal Bank of Scotland both saw much steeper falls in their respective results.

2.91%

Q1 net interest margin

 

Digital strategy

Chief Executive Antonio Horta-Osorio has put in place a strategy that centres around the use of digital services to enhance the company’s efficiency. This has seen the bank increase the number of loans it extends to its customers, at higher margins and with lower operating costs.

Yet, Antonio Horta-Osorio is never far from the financial press over his cool £6.3m pay packet and pension arrangements. While this might not be an issue now, shareholders might increasingly question the generous pay packet if revenues slip.

 

Slowing mortgage market

UK banks are now in an ultra-competitive environment for mortgage sales. With fewer prospective buyers, banks, including Lloyds, have been slashing mortgage prices. The latest figures from HMRC show house sales dipped 6.4% in May, and 11.3% annually as buyers increasingly hold off buying a new home in case of a crash.

Yet, this strategy comes at the expense of profits, with banks wary of increasing margins and losing ground to competitors.

 

What the analysts think

The consensus is for Lloyds to bring in revenues of £18.413 billion for 2019, a dip from the £18.649 billion seen last year. By 2020 analysts reckon this will rebound slightly to £18.432 billion.

Still, Horta-Osorio's efficiency strategy looks like it will see earnings protected over the next couple of years at least. Earnings per share are expected to rise from 7.64 last year to 7.81 in 2019. Things look even better in 2020, with earnings per share expected to come in at 7.95.

Technical analysis from David Madden, Market Analyst at CMC Markets: "The stock has been pushing lower since April, and while it holds below the 200-day moving average at 58.67p, the bearish move is likely to continue. Support might be found at 54p. 60.87p (100-day moving average) might act as resistance."

 

Analysts' consensus price target is 75.37p, which would represent a 30% upside on the current price. Although this comes after a swath of revisions in June fuelled by lower revenue expectations.

Last month, HSBC, Barclays and Morgan Stanley all slashed their respective share price targets for Lloyds. HSBC moved its target from 59p to 58p, while Barclays trimmed off 5p for an 80p target.

Morgan Stanley lowered its target in June, from 78p to 70p. Despite the revision Morgan Stanley said the bank remains the most profitable in the UK and Europe. It also said the bank is a top pick and thinks its valuation is “compelling”.

 

What to look out for?

On 31 July Lloyds will release half year results for 2019. Numbers to look out for include operating margin, mortgage sales and consumer lending. All should provide a measure of how well the bank is standing up to macroeconomic and political headwinds.

Further cost cutting could come from Lloyds use of digital channels to protect margins. 2018’s full year numbers revealed that there were 15.7 million active digital customers, which should only increase. 

According to a report from Juniper Research, the number of mobile banking users is expected to reach 2 billion by 2022. With more people shifting to digital, this could result in more branch closures and, in turn, fewer costs.

 

Time to buy?

A P/E ratio of 10.48 makes the stock slightly more expensive than both Barclays (P/E 7.97) and HSBC (P/E 9.75). A price-to-book ratio of 92.69 also points to the stock being overvalued compared to both those banks, with RBS’s at 58.91 and Barclays at 41.58.

Still, income-seeking investors will be attracted by the solid dividend yield and high payout ratio. But for those looking for short-term gains, a beta rating of 0.48 indicates movement in the stock has been limited recently. 

0.48

Beta ratio (3Y monthly)

However, this could all be about to change as Brexit increasingly comes into focus. Boris Johnson, current favourite to succeed Theresa May as prime minister, has promised to pull the U.K. out of the EU by 31 October, deal or no deal.  

While Lloyds’s financials are in good health, the downturn in the stock’s value could mean traders are pricing in the impact of a chaotic Brexit. For investors who think that Brexit fears are overdone and a rebound is on the cards, now could be a good time to pick up shares in the bank.

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