Is the Lloyds share price cheap?

A high current price-to-earnings ratio may make the Lloyds share price look expensive but it actually might be very cheap.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Many UK investors keep a close eye on the Lloyds (LSE: LLOY) share price. It’s a mainstay in many portfolios. The question is: after the share price has risen by about 50% over the last 12 months, are the shares still cheap?

Value metrics

On the face of it, Lloyds appears expensive with a price-to-earnings ratio of 39. I think the ratio has been skewed by the bank’s lower earnings during the pandemic. If we look further out, the P/E is expected to come down to around eight, as earnings recover. Other valuation metrics also point to Lloyds being pretty decent value. For example, the price-to-book ratio is 0.68, indicative of very good value.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

When compared to Natwest, another UK focused bank, I’d suggest Lloyds continues to look cheap. Natwest has a forward P/E of 10.

A recovery in the dividend may also make Lloyds share appealing to dividend growth investors.

Lloyds to become a private landlord

Sources in the City have recently revealed that Lloyds is set to become a private landlord. The plan, codenamed ‘Project Generation’, is aimed at bringing in another source of income for Lloyds. The plan seems well advanced — there’s a registered subsidiary, Citra Living, and rumours that it’s close to securing a block of flats in Nene Wharf, Peterborough.

In recent years the bank has also expanded into wealth management. These moves have been designed to help combat the long period of very low interest rates and even the threat of negative interest rates.

If this latest growth initiative, alongside its move into wealth management, succeed, and the UK economy recovers as expected, it could potentially make the Lloyds share price look cheap. That’s even after the recent share price recovery.

A rise in interest rates?

As inflation has crept up so inevitably has the potential for higher interest rates. I personally wouldn’t base any investment in Lloyds now on that possibility, as a rise could be years away, but it’s something to consider.

A rise in interest rates, whenever it happens, should be good for the profitability of all banks. That’s generally accepted among investors and economists as being the case.

What could hold back the Lloyds share price?

Of course, the Lloyds share price could be held back by any number of foreseeable or unknown developments. The principal concerns I’d have about adding the share to my portfolio would be Lloyds’ lack of international exposure and investment banking. It’s very reliant on UK retail banking. In turn, that means any economic downturn will likely hit it harder than other banks that are more diversified.

Although the Lloyds share price could rise further, I won’t be adding it to my portfolio. I think there are better investing opportunities both in the FTSE 100 and the wider UK stock market.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Andy Ross owns no share mentioned. 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.

More on Investing Articles

A couple celebrating moving in to a new home
Investing Articles

2 key stock picks for reliable passive income

I’m looking at stocks that can deliver reliable passive income to complement my growth picks, and I think I’ve found…

Read more »

A Rolls-Royce employee works on an engine
Investing Articles

In penny stock territory, is the Rolls-Royce share price set to soar?

The Rolls-Royce share price has sunk recently, falling into penny stock territory. But with flying hours recovering, is it too…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Lloyds shares drop 20% in 4 months. Should I buy now?

Lloyds shares have lost a fifth of their value since peaking on 17 January this year. But after rebounding from…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

As the stock market recovery stalls, should I wait to buy?

Has the stock market recovery run out of steam? If so, what does that mean for our writer's portfolio? Here…

Read more »

Diagonal chain made of zeros and ones. Cryptocurrency and mining.
Investing Articles

At 55p, is the Argo Blockchain (LON:ARB) share price too cheap to miss?

With a low P/E ratio and strong financial results, could the Bitcoin miner be good value for money?

Read more »

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

Here are 2 recession-proof FTSE stocks!

In the face of current economic uncertainty and fears of a looming recession, this Fool identifies two recession-proof FTSE stocks.

Read more »

British Pennies on a Pound Note
Investing Articles

Here is 1 penny stock primed to benefit from the construction boom!

Jabran Khan delves deeper into a penny stock that he believes could benefit from the construction boom, and explains why…

Read more »

Various denominations of notes in a pile
Investing Articles

Here is 1 top passive income stock to buy and hold!

Jabran Khan wants to boost his passive income stream through dividends and has identified this insurance giant as a way…

Read more »