The last two years have been hugely disappointing for investors in Lloyds (LSE: LLOY). That’s because the bank’s share price is roughly exactly where it was in September 2013 which, after the year prior to that, is a major comedown.
In fact, in the year from September 2012 until September 2013, Lloyds soared by 90% as the market finally began to realise that its shares were priced far too low given its upbeat outlook. And, following the last two years, the same now seems to be true.
For example, Lloyds trades on a price to earnings (P/E) ratio of just 8.6. By any investor’s standards, that is supremely low and indicates just how far out of favour Lloyds has become among the investment community.
A possible reason for such a low valuation is the continued sale of the government’s stake. On the one hand, this should be viewed as good news by the market since it shows that Lloyds no longer needs to be on ‘life support’ and, under its current strategy, is set to become a highly profitable, standalone bank. On the other hand, though, constant selling of a vast stake in any company is bound to cause a supply/demand imbalance and this could explain Lloyds’ lacklustre share price performance in the last 24 months.
Similarly, while Lloyds has returned to profitability in the last couple of years, its earnings growth forecasts are somewhat disappointing and could explain the weak investor sentiment which it has experienced. For example, Lloyds is due to post a rise in its net profit of 5% this year, followed by a fall of 7% next year.
This, on a standalone basis, is disappointing but when it is compared to a number of other UK-focused banks, it looks even more lacklustre. As such, investors may be preferring to invest in other banks at the present time – particularly challenger banks which are enjoying a purple patch right now.
Lloyds, though, has huge potential. It has an excellent management team which has cleaned up the bank’s balance sheet through the sale of non-core assets and has also turned Lloyds into a more efficient, leaner and, in the long run, more profitable entity than it was in the past. And, with Lloyds having one of the lowest cost:income ratios in the UK banking sector (it stood at just 48% in the first half of the current year on an underlying basis), it seems to offer strong long term growth potential.
Furthermore, Lloyds’ management team seems to be content to share the bank’s success with its investors, since Lloyds is aiming to pay out up to two-thirds of profit as a dividend. And, while it is currently not at that level, Lloyds is due to yield as much as 5.3% next year, thereby making it a supreme income stock even in the shorter term.
Clearly, a glut of supply of Lloyds’ shares is likely to continue to put a brake on its share price performance. However, it remains a highly profitable bank with a supremely low valuation, very efficient business model and generous yield. As such, and while there are a number of great value stocks on offer after the market’s recent fall, Lloyds could well be the best value of them all.
