I keep a close eye on Lloyds Banking Group (LSE: LLOY) as a bellwether (guide) to the state of the UK economy. Lloyds has a huge UK presence — and not just from its branches on our high streets. The FTSE 100 bank has around 65,000 employees serving roughly 30m customers. It is the UK’s largest mortgage lender, with more than a fifth of existing home loans. It’s also a leading provider of credit to British businesses and individuals. That’s why I check the Lloyds share price most days, even though I don’t own this share — yet.
The Lloyds share price plunge
From early 2017 to late 2019 — almost three years — the Lloyds share price pretty much went sideways. On 13 December 2019, it closed at 64.33p, down 7.1% since 24 February 2017 (five years ago). But as Covid-19 went global in early 2020, Lloyds shares crashed along with the wider market. Almost unbelievably, the share price crashed to a rock-bottom low of 23.58p on 22 September 2020. The next day, I said Lloyds shares offered a lifetime of value.
Lloyds bounces back
As I write, the Lloyds share price hovers around 50.83p, valuing the group at £36.1bn. That’s almost double the market cap seen at September 2020’s low. Here’s how the shares have performed over five time periods: Five days: -0.8% | One month: -1.7% | Six months: +15.7% | One year: +32.4% | Five years: -26.6%. Thus, Lloyds has been a great buy since 2020, but a loser since 2017.
For the record, I haven’t owned Lloyds shares since the early stages of the global financial crisis of 2007-09. Back then, bank and financial stocks dominated my portfolio. But I ditched the lot in 2007-08, after growing increasingly anxious about a house-price crash and credit crunch. I’ve hardly bought bank shares since. But I think Lloyds shares might be my first buy in banking in many a year.
I see Lloyds as dirt-cheap today
At the current Lloyds share price, the stock trades on a modest price-to-earnings ratio of 7.8 and an earnings yield of 12.9%. The dividend yield of 2.4% a year is lower than the FTSE 100’s 4% cash yield. But the UK banking regulator ordered banks to cancel their dividends early on in the coronavirus crisis. Hence, Lloyds’ dividend is coming back from a lower base, so I expect it to keep rising.
To me, these are undemanding fundamentals, especially for a large-cap FTSE 100 share. What’s more, four economic tailwinds appear to be in Lloyds’ favour. First, the UK housing market is going great guns, which is good news for mortgage lenders. Second, the Bank of England has raised its base rate twice, with more rate rises pencilled in. Higher interest rates usually mean wider net interest margins (rate spreads) for big lenders such as Lloyds. Third, the UK economy is growing strongly, which might eventually lead to increased business borrowing. Fourth, Lloyds has a strong balance sheet, including billions of pounds of spare capital. Ideally, this cash cushion should be returned to shareholders as higher dividends and share buybacks.
All four of these factors should help to support the future Lloyds share price. However, hardly anything ever goes smoothly over any lengthy period. For example, a resurgence of Covid-19 would throw a big spanner in my expectations. Also, a cooling economy would hit Lloyds’s growth. Even so, I plan to buy ASAP with the Lloyds share price at current levels!
