At 43p, is now a good time to buy cheap Lloyds shares?

Interest rates are on the rise and Lloyds shares may be cheap, so is it time to buy shares in this company for long-term growth?

| More on:
Hand of person putting wood cube block with word VALUE on wooden table

Image source: Getty Images

Key Points

  • Interest rates rose from 0.75% to 1% yesterday, meaning the company may charge more for loans and mortgages
  • Lloyds has lower trailing and forward P/E ratios than two major competitors, suggesting that the share price may currently be undervalued
  • Profit before tax rose from £1.2bn to £6.9bn between 2020 and 2021

A giant of the UK banking industry, Lloyds Banking Group (LSE:LLOY) is a constituent of the FTSE 100 index. Currently trading at 43.7p, it’s in prime penny stock territory. While I don’t currently own shares in the company, should I be buying at these low levels? Let’s take a closer look. 

Why Lloyds shares may be cheap

By referring to trailing and forward price-to-earnings (P/E) ratios, I can better understand if a company is currently under- or overvalued. These ratios are found by dividing a share price by earnings, or forecast earnings for forward P/E ratios.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

Lloyds has trailing and forward P/E ratios of 6.41 and 7.12, respectively. These are lower than two major competitors. HSBC, for instance, has trailing and forward ratios of 10.96 and 8.8. Also, Standard Chartered registers 11.39 and 8.26. 

This may suggest that the Lloyds share price is lower than we might expect. It may therefore be a bargain at current levels.   

Interest rate hikes

The macro environment going forward may also be favourable for the company. The Bank of England increased interest rates yesterday from 0.75% to 1%. While this is still historically low, more hikes can be expected in the near future.

Interest rates are important when analysing a banking business because they have an impact on how much the bank can charge for loans and mortgages.

As interest rates rise, Lloyds will likely charge customers more for borrowing services. Additionally, around three-quarters of Lloyds loans are mortgage-focused, so the business has large exposure to the UK housing market.

There has been some speculation that rising inflation and energy bills will act as deterrents to potential homeowners. This could lead to a decline in customers seeking mortgages.

However, UK housebuilder Taylor Wimpey recently stated that it doesn’t foresee a decline in demand for housing.  

Strong financial results

Financial results are also showing improvement. For the three months to 31 March, the company reported profit before tax of £1.6bn. While this was lower on a year-on-year basis, it was higher than the forecast £1.4bn.

Despite this, CEO Charlie Nunn commented that the outlook within the UK banking market was still “uncertain”.

However, Lloyds has rebounded strongly from the difficulties it faced during the pandemic, although it should be noted that past performance is not necessarily indicative of future performance. For 2021, it posted revenue of £37.4bn. This was an increase from £29bn in 2020.

Over the same time period, profit before tax rose from £1.2bn to £6.9bn. This is a testament to the strength of the underlying business.

Overall, I think the operating environment and rising interest rates could be a good opportunity for the company. It is therefore conceivable that the Lloyds share price could rise in the near future. I will be buying shares soon for the benefit of my long-term portfolio.

Should you invest £1,000 in Lloyds right now?

Before you consider Lloyds, you’ll want to hear this.

Motley Fool UK's Director of Investing Mark Rogers has just revealed what he believes could be the 6 best shares for investors to buy right now… and Lloyds wasn’t one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 shares that are currently better buys.

All you need is an email address to get started

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings, Lloyds Banking Group, and Standard Chartered. 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.

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 considered, so you should consider taking independent financial advice.

More on Investing Articles

Senior woman wearing glasses using laptop at home
Investing Articles

2 value stocks with high dividend yields to buy in July

Our writer examines two value stocks for his portfolio that marry low price-to-earnings ratios with high dividend yields.

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Could I double my money buying at today’s Scottish Mortgage share price?

The Scottish Mortgage share price has crashed. Does that mean now could be a rewarding moment for our writer to…

Read more »

Hand holding pound notes
Investing Articles

Will the Lloyds dividend yield top 5%?

Our writer considers the outlook for the Lloyds dividend -- and what he should do about it.

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

3 ways I’m protecting my FTSE 100 stock portfolio right now

Jon Smith writes about several different ways he's trying to plan for the future to try to make his FTSE…

Read more »

Preparing a budget during a pandemic
Investing Articles

3 reasons I think the Aviva share price could double in 5 years

I'm not aiming to get rich quick, but today's Aviva share price makes me want to buy more and hold…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The easyJet share price fell 10% last week. Here’s what I’m doing!

Last week saw the easyJet share price continue its poor performance. Here, this Fool weighs up if this is an…

Read more »

Lady wearing a head scarf looks over pages on company financials
Investing Articles

Are Royal Mail shares a buy today?

Royal Mail shares have experienced a drastic fall this year. In this article, Charlie Keough decides whether this is an…

Read more »

A bull outlined against a field
Investing Articles

2 FTSE 100 shares for the new bull market

I think the FTSE 100 is home to some promising companies such as these two I'd consider owning shares in…

Read more »