The Lloyds Banking Group (LSE: LLOY) share price has been highly volatile in recent days. Eroding market confidence as Russia invaded Ukraine drove the FTSE 100 stock to its cheapest level for three months on Thursday. But it bounced back strongly on Friday to close a shade below 50p.
The Lloyds share price may have recovered strongly last week. As a consequence the bank remains 27% more expensive than it was this time a year ago. Hopes of a strong economic recovery and several profits-boosting interest rate rises have helped the bank soar in value during this time. Yet it still offers plenty of value for money on paper.
City analysts expect earnings at the bank to fall 16% year-on-year in 2022. A cooling following last year’s electrifying rebound is perhaps no surprise, however. What’s more, current forecasts leave Lloyds trading on a forward price-to-earnings ratio of just 7.9 times.
The Lloyds share price also looks dirt-cheap to me as an income investor. Analysts think the bank’s dividend will leap from 2p per share in 2021 to 2.6p in the current year. This results in a 5.2% dividend yield, one that smashes the broader 3.5% FTSE 100 average.
Profits bounce back
The bank’s full-year results last week illustrated how strongly its highly-cyclical operations have rebounded of late. Pre-tax profit jumped to £6.9bn in 2021 from £1.2bn a year earlier, Lloyds said, with net income rising 9% year-on-year to £15.8bn. Profits also benefitted from the unwinding of £1.2bn worth of loan loss charges that the bank reported during the pandemic.
As a statement of confidence looking ahead, Lloyds also raised the full-year dividend for 2021 to 2p per share. This was up significantly from 0.57p previously. And it has launched a share buyback programme of up to £2bn, too, a decision Lloyds says reflects “the strong capital position of the group”.
Is Lloyds’ share price too cheap to miss?
Lloyds was always set for a strong rebound from 2020’s pandemic-coloured lows. But my fear as an investor is whether the Black Horse Bank is beginning to run out of road. As someone who buys shares for the long haul, the possibility of more big dividends this year isn’t enough to encourage me to invest.
The UK is facing a worsening cost of living crisis as inflation heads through the roof. Consumer confidence is taking a whack and the number of businesses in distress is increasing. I think profits at Lloyds could come in much worse than analysts currently forecast, then, as economic conditions worsen and that this pressure could spill over into 2023 too.
I also wouldn’t buy Lloyds because these economic pressures could cause interest rates to rise much more slowly than bank investors might be hoping for. Last week a key Bank of England policy maker said that only a “modest tightening” of policy is likely in the short-to-medium term, dealing a further blow to Lloyds’ profits outlook.
So Lloyds’ share price is cheap. But this cheapness is a reflection of the huge problems it still has to overcome to generate strong and sustained profits growth. This is why I’d much rather buy other UK shares for these challenging economic times.
