With the FTSE 100 trading on a price-to-earnings (P/E) ratio of less than 13, it appears to offer good value for money. That’s because its P/E ratio has historically been much higher, with the index’s yield of over 4% also indicating that now could be a good time to buy for the long run.
However, Lloyds (LSE: LLOY) offers far superior value to the FTSE 100 and therefore it appears as though the part-nationalised bank could be set for significant outperformance of a potentially rapidly rising wider index.
Here’s the good news
For example, Lloyds trades on a P/E ratio of just 7.5. That’s around 40% lower than the FTSE 100’s P/E ratio and this could be a potential catalyst to push its share price higher. Further evidence of its dirt cheap valuation can be seen in Lloyds’ forward yield of 6.4%, which is nearly 60% higher than the wider index’s already-very-generous yield.
This not only indicates that Lloyds is now a hugely enticing income play, but also that its shares could rise to as much as 93p and still offer a yield of 4%. And with Lloyds still set to pay out just 48% of profit as a dividend in the current year, there’s scope for further brisk increases in shareholder payouts over the medium-to-long term.
Clearly, Lloyds is hurting from the uncertain economic outlook that has spooked market sentiment in stock markets across the globe. However, Lloyds appears to be well-positioned to deliver strong growth figures over the medium-to-long term owing to its sound strategy.
For example, in recent years Lloyds has gradually disposed of a number of assets that it felt failed to offer an appealing risk/reward ratio. As such, it has de-risked its asset base and this has allowed it to generate considerable efficiencies that have made its cost-to-income ratio one of the lowest in the UK banking sector. In fact, in the third quarter of 2015 its cost-to-income ratio stood at just 48%, despite additional investment and simplification costs being undertaken.
This highly successful strategy has the potential to attract investors since a number of Lloyds’ peers are either struggling to keep costs down or else are still coping with legacy issues from the global financial crisis. As such, Lloyds could become a favoured banking stock in the coming months and years.
Benefits of UK focus
While the global economic outlook is relatively uncertain, Lloyds should benefit from continued low interest rates. They should cause default rates to stay low and encourage asset prices to rise even further. In turn, this should have a positive impact on Lloyds’ net asset value and also on its profitability. And with the UK economy continuing to offer resilience and robust growth despite deflationary pressure from abroad, Lloyds appears to be well-positioned to deliver on its expansion potential and post upbeat earnings growth numbers in 2016 and beyond.
For this reason, as well as its low valuation and sound strategy, Lloyds seems to be a logical purchase at the present time.
