Is Lloyds Banking Group a buy ahead of its earnings release?

Anna Sokolidou presents essential reading for investors contemplating buying Lloyds Banking Group shares.

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Long-term investors aim to get great value for their money. This usually means buying large and sound companies at low prices. Some of the criteria for a good value investment are a low price-to-earnings ratio, a low price-to-book-ratio and regular dividend payments.

One of these investment opportunities seems to be Lloyds Banking Group (LSE:LLOY). Here, I will examine this well-established bank – due to release its 2019 results on 20 February – in detail.

The bank looks like a bargain right now in spite of its high earnings and the hawkish stance of the Bank of England. British banks are in a much better position than their peers in Switzerland or the Eurozone, where negative rates have heavily impacted the banking industry.

Lloyds Banking Group has one of the lowest price-to-earnings ratios in the FTSE 100 index, which is below 8. This is one of the lowest ratios among the peers even though Lloyds is the largest bank in the UK.

The bank’s shareholders enjoy a dividend yield of almost 6% per year currently, and also benefit from Lloyds’ share buy-back programme. In addition to that, the blue-chip stock is trading at just about 90% of its book value per share, which I think is unbelievable in comparison to many companies in other sectors that seem to be highly indebted.

Even though the third quarter of 2019 was marked by a decrease in profits compared to the same period of 2018, it was due to an additional PPI insurance charge.

The bank’s overall efficiency seems to be constantly increasing. Lloyds Banking Group is planning to close 56 branches this year, which should make its business “leaner and fitter”, and the cost-cutting initiative should contribute to improved profits and dividends. In fact it currently has one of the lowest cost-to-income ratios in the banking industry, which serves as a good indicator of its efficiency.

The most recent share price changes resulted from external factors. Lloyds’ shares rallied in the middle of December due to the Conservative party’s win and the improved chances of a Brexit deal. However, the enthusiasm faded afterwards due to investors’ doubts that a trade deal with the EU would be signed. The coronavirus problem also contributed to the shares’ recent pullback in price.

In my view, Lloyds is a wonderful long-term investment at a time when the world’s stock indices are at record highs and glamorous high-tech companies seem to be overvalued. In spite of the world economy’s stagnation, the recently published macroeconomic statistics for the UK’s services sector show signs of relief and could also translate into even better returns for Lloyds. However, I would be mindful of external geopolitical factors. Possible “black swan” events include a no-trade deal Brexit, bad US-China or US-EU trade war news and even US election results.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Anna does not own shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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