Lloyds Banking Group (LSE: LLOY) is one of the UK’s very largest financial firms. The Black Horse bank currently employs around 65,000 workers to service 30m customers. Its leading brands include Lloyds Bank, Halifax, Bank of Scotland, Birmingham Midshires, Scottish Widows, and MBNA. Lloyds is also the UK’s largest mortgage lender, with almost a fifth of the total market. And the group’s origins go back to 1695, so it’s been around for three centuries and more. Yet the Lloyds share price was limping along a month ago, before taking off over the past five weeks.
The Lloyds share price leaps
To be honest, I was surprised at the weakness of the Lloyds share price from June to September. The FTSE 100 index softened in late summer, closing just above 6,900 points on 20 September. Yet LLOY stock fared much worse. On 1 June, the shares hit an intra-day high of 50.56p, their 52-week peak. They then fell fairly steadily, closing at 42.41p on 8 September. That’s a fall of 8.15p — or 16.1% — in 99 days.
Following this slump in value, I saw Lloyds as a bargain buy. Hence, on 9 September, with the Lloyds share price trading at 42.5p, I said, “I would happily buy at the current share price.” As I write, the shares hover around 48.44p. That’s a gain of over 6p — or 12.4% — in just over a month. Yet again, this demonstrates the power of old-school value investing: buying into good businesses with low (or fair) share prices.
Of course, it’s not been plain sailing for the Lloyds share price. Although the stock is up more than 80% in a year, it’s been a poor performer over the longer term. Indeed, the shares are down 7.9% over two years, 16.2% over three years and 7.6% over the past five years. So LLOY has been a short-term cherry, but a long-term lemon.
What might drive LLOY higher?
At the current Lloyds share price, the banking behemoth is valued at £34.5bn (a fraction of its former glories). For me, the shares still look cheap today. They trade on a price-to-earnings ratio of 7.4 and a bumper earnings yield of 13.5%. Also, they offer a dividend yield of 2.6% a year — below the FTSE 100’s forecast 4.1% for 2021, but with room for growth. But what might drive LLOY higher and lead to a re-rating of the shares?
I suspect the Lloyds share price might see some action on 28 October, when the bank releases its Q3 interim management statement. Rising earnings per share or lower bad debts could inject new life into the stock. So might news of a higher dividend, something many Lloyds shareholders eagerly anticipate. Another event that might reinvigorate LLOY is higher UK interest rates — something the Bank of England is already signalling could happen early in 2022. Low interest rates curb banks’ profits, so higher rates could mean higher net interest margins for Lloyds.
I don’t own Lloyds stock today. However, I would buy at the current share price of 48.44p. That said, owning LLOY might be a rocky road — especially if Covid-19 mutates again, more lockdowns are imposed, or the global economy cools down!
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Cliffdarcy has no position in any of the shares 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.