Lloyds Banking Group (LSE: LLOY) is one of the most widely held UK shares. Popular among private investors as well as its employees, Lloyds has hundreds of thousands of individual shareholders. Thus, LLOY is one of the most popular tickers in UK searches. That said, the Lloyds share price has had a tough five years, putting shareholders through the wringer.
The share price slumps and soars
At its five-year high in May 2017, the Lloyds share price was nearing 72p. After several years of lacklustre performance, the shares closed out 2019 at 62.5p. However, as Covid-19 infections spread in early 2020, Lloyds stock crashed. Unlike many other FTSE 100 shares, Lloyds didn’t hit rock-bottom on ‘Meltdown Monday’ (23 March 2020). Instead, the shares collapsed to a low of 23.58p on 22 September 2020.
Just two days later, I wrote, “I see a lifetime of value in Lloyds“, with the Lloyds share price at 24.58p. As I write, the shares hover around 47.41p. That’s an increase of almost 23p per share, meaning that the stock has almost doubled (+92.9%) in just over nine months. Despite this turnaround, I still like the stock. Here are three reasons why.
Why I still like Lloyds
My first reason for buying at the current Lloyds share price is its decline from recent highs. On 1 June, the stock hit a 2021 high of 50.56p. Since then, it has declined by more than 3p, leaving it 6.2% off its 52-week peak. As a veteran value investor, I relish buying shares when they show weakness. But I do so only if the underlying business case is still solid. For Lloyds, I think nothing much has changed since May.
Second, after cancelling its cash dividend in 2020, Lloyds has now restored it, albeit at a much lower level. Lloyds paid a final dividend for 2020 of 0.57p a share on 25 May. An interim dividend for 2021 should be announced with the bank’s half-year results on 29 July, to be paid in late September. As an investor keen on accruing passive income, I hope to see steady (or even steep) rises in this payout as Lloyds returns to post-pandemic health.
Third, and most important, this stock still looks cheap to me at the current Lloyds share price. Granted, the bank’s earnings are depressed right now, but are expected to rebound in 2021/22. On a forward basis, a forecast price-to-earnings ratio of eight gives a chunky earnings yield of 12.5%. Such a bumper earnings yield could support a dividend yield of 6.25% a year, twice over. Also, Lloyds has a rock-solid balance sheet and is valued at a steep discount to its underlying assets. Again, these are indicators of deep value among stock-pickers.
Beware of Covid-19 setbacks
Finally, although I’m currently bullish (positive) for Lloyds’ future, that might change suddenly. As with all banks, Lloyds is very cyclical (geared to the economic cycle). Right now, economists expect a multi-year boom in the UK and global economies. Alas, if new and more deadly variants of Covid-19 emerge, then this might blow up these predictions. Indeed, the threat of further UK lockdowns could send the Lloyds share price spiralling downwards again. In summary, I don’t own Lloyds shares today but, on balance, I’d buy and hold at current levels.