The Lloyds share price still looks cheap ahead of results

Lloyds’ shares have performed strongly since the depths of the pandemic. Recently upgraded forecasts suggest the stock is still 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Lloyds (LSE: LLOY) share price is on a roll. At 52p, as I’m writing, it’s up 40% over the last 12 months, and has more than doubled since its pandemic lows of September 2020.
 
These are impressive gains in anybody’s book. But the stock still looks cheap on a number of valuation measures.
 
The company recently compiled and published an updated consensus of City analysts’ forecasts ahead of the group’s annual results, scheduled for 24 February.
 
Let me walk you through these hot-off-the-press expectations for the 2021 numbers. And the latest forecasts for 2022, 2023 and 2024.

Upgrade

For 2021, analysts now expect Lloyds to deliver net income of £15.5bn, an underlying profit before tax of £7.84bn, earnings per share (EPS) of 8.1p and a dividend of 2.07p per share. Year-end tangible net asset value (TNAV) is forecast to be 56.6p per share.
 
All of these numbers have been upgraded from the full-year consensus Lloyds published ahead of its Q3 results. And it’s on the back of these upgrades that the stock still looks cheap.

Discount assets

Lloyds’ price-to-TNAV (P/TNAV) is 0.92, meaning buyers of the shares today are paying 92p for every £1 of the bank’s assets.
 
To give this some historical context, in the years between the Brexit referendum and the pandemic, the stock traded within a P/TNAV range of 1.15 to 1.35. If the market reverted to valuing the stock in this region, the shares would be trading somewhere between 62p and 73p (20%-40% upside from the current level).

Cheap earnings rating

In addition to the discount asset valuation, Lloyds is cheaply rated on its earnings. The price-to-earnings (P/E) ratio is just 6.4 — about half that of the FTSE 100.
 
However, the 2021 EPS forecast of 8.1p is elevated by an exceptional impairment credit. This is due to a chunk of the big impairment charge Lloyds took in 2020 reversing in 2021 on an improved macro-economic outlook.
 
With a normalisation of impairments expected going forward, analysts are forecasting EPS of 5.6p for 2022. On this basis, the P/E is 9.3. Not as cheap as calculated on the exceptional 2021 earnings, but more realistic and still a significant discount to the wider market.

Sector-leading dividend yield

A third value indicator is Lloyds’ sector-leading and above-market-average dividend yield. The expected 2021 payout represents a yield of 4%.
 
And while 2022’s EPS is set to drop back from its elevated 2021 level, the same isn’t true of the dividend. The consensus is for a 17% rise to 2.42p, lifting the yield to 4.65%.
 
Furthermore, analysts see a rosy outlook for shareholder returns beyond 2022.

Excess capital distributions

The outlook is underpinned by Lloyds’ strong capital position. The consensus view is that the bank’s year-end 2021 Common Equity Tier 1 (CET1) ratio will stand at 16.3%. This is significantly above a regulatory minimum requirement of 11% and Lloyds’ ongoing target of 12.5% plus a management buffer of 1%.
 
The City expects the company to announce a distribution of about £1.4bn (2p per share) of excess capital in the upcoming results. And similar distributions each year through to 2024.
 
These distributions could be by way of special dividends (in addition to the attractive progressive ordinary dividend I’ve already discussed). Or it could be by way of share buybacks. The majority of analysts are currently forecasting buybacks.
 
Buybacks deliver value for long-term shareholders. Simply by sitting on their shares, such holders own a slightly larger slice of the business with each tranche of shares the company buys back. It also means entitlement to a slightly larger slice of all future dividend pots.

Margin of safety

It’s important to remember that analysts’ forecasts are exactly that. Forecasts. A company may meet, fall short or exceed them. And, as we’ve seen from the upgrade to the consensus on Lloyds since October, forecasts can change — for better or worse — depending on developments in the external and/or internal environment for the business.
 
Lloyds is a bellwether of the UK economy. The consensus numbers on things like impairments and asset quality suggest analysts are modelling a fairly benign external environment for the bank over the next few years. And looking at things like the cost-to-income ratio, they’re also modelling increasing operational efficiency within the business.
 
However, Lloyds’ discount P/TNAV, cheap earnings rating and high yield, suggest the market is valuing the stock for future downgrades. Personally, I think the valuation offers some margin of safety against downgrade risk. And that Lloyds may have investment appeal for me in the near future.

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.

Graham has no position 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

6.9% dividend yield! 2 cheap stocks to consider for a £1,380 passive income

Looking for a market-beating passive income? These FTSE 100 and FTSE 250 dividend stocks could provide a healthy second income…

Read more »

Mature black couple enjoying shopping together in UK high street
Investing Articles

Potentially 34% undervalued, should I be watching the boohoo share price?

The boohoo share price has seen a rocky few years, but with signs that the economy is improving, could this…

Read more »

Investing Articles

Is the Amazon share price primed for a drop?

The Amazon share price has been on a tear for the last year, but can this trend continue? Gordon Best…

Read more »

Photo of a man going through financial problems
Investing Articles

Down 15% in a week! What’s gone wrong with the National Grid share price?

The National Grid share price isn't supposed to crash but now it has. Harvey Jones is wondering whether to take…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

Taylor Wimpey just paid me £158.78. I’m aiming to turn that into a £100k yearly second income

Harvey Jones says small, regular dividend payments can turn a few pounds into a mighty second income, if he gives…

Read more »

A pastel colored growing graph with rising rocket.
Value Shares

These FTSE 250 shares are tipped to rise 14% to 18% in the next year!

Looking for the best FTSE 250 momentum shares to buy? Here are two that City analysts expect to soar in…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Lloyds’ share price is up 20% in 3 months! How high can it go?

Lloyds’ share price has ripped higher recently. Here, Edward Sheldon provides his view on the level it could potentially climb…

Read more »

Investing Articles

Why the Rolls-Royce share price could continue to outperform

The Rolls-Royce share price keeps moving forward, but this Fool thinks it's still behind where it ought to be after…

Read more »