While the banking group Lloyds (LSE: LLOY) has an iconic brand and millions of customers, it trades as a penny stock. With the Lloyds share price languishing around 44p, is it a bargain or a value trap?
The Lloyds share price: three bull arguments
As the UK’s leading mortgage lender, Lloyds is set to benefit from continued buoyancy in the housing market. But even if prices cool, its mortgage book could continue to be a significant profit driver. As long as borrowers continue to repay their mortgages, fluctuations in house prices won’t necessarily harm the Lloyds business markedly.
A second bull case for Lloyds right now is its dividend. It has restored the dividend it suspended last year. The interim dividend of 0.67p might not sound much. But typically Lloyds’ final dividend is double its interim payout. That suggests that the current Lloyds share price offers a prospective yield of around 4.3%. In fact I think the payouts could be higher. The bank effectively increased its capital reserves during the time its dividend was suspended and this could help fund dividend growth. Dividends are never guaranteed, though.
Finally I like the relative simplicity of the Lloyds business, as far as any banking business is ever simple. The company focuses squarely on retail and commercial banking with UK front and centre. Financial institutions are always exposed to risk. But Lloyds’ limited international or investment banking exposure compared to its peers makes me feel its results could be more stable than some banks.
Three bear arguments against the Lloyds share price
Although I am bullish, the bank’s penny share status underlines that many investors are unconvinced about the merits of Lloyds.
Although it has risen 66% in the past year, the Lloyds share price has been falling since its May peak. That could suggest that the share price got ahead of business performance in some investors’ opinion. It could continue to fall back.
Secondly, the dividend is fairly meagre right now. A final dividend hasn’t been declared yet, and last year’s experience was a sharp reminder that dividends can suddenly dry up at short notice. For a yield-focussed investor, there are other FTSE 100 companies offering higher dividends than Lloyds.
A third bear concern is whether the company’s move into becoming a landlord could turn out to be a costly diversion from its main business. That risks hurting the bank’s profits.
Bargain or value trap?
A value trap is a share that seems cheap but is actually poor value when its business prospects are properly understood.
There are definitely risks in the Lloyds share price, as I outlined above. But I don’t see it as a value trap. With its large, profitable banking franchise, iconic set of brands, and continued strength in the UK lending market, I am bullish about the outlook for the financial services powerhouse. I see the current Lloyds share price as a bargain. I’d therefore consider topping up the Lloyds holding in my portfolio.
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Christopher Ruane owns 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.