At 46p, is the Lloyds share price a bargain not to be missed?

Referring to P/E ratios and rising interest rates, Andrew Woods explains why he thinks the Lloyds share price may be good value for money.

| 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.

Young mixed-race woman looking out of the window with a look of consternation on her face

Image source: Getty Images

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.

Key Points

  • Interest rates are rising, meaning the company can charge more for borrowing services
  • It has a compound annual EPS growth rate of 11.25%
  • Last year, the business paid a dividend of 2p per share

Over the past couple of years, Lloyds (LSE:LLOY) shares have been volatile. In the past three months, they’ve been relatively flat under 50p. In a climate of rising interest rates, though, could the stock be a bargain? Let’s take a closer look.

High earnings growth and a low P/E ratio

The FTSE 100 business exhibits strong long-term growth. Between 2017 and 2021, for instance, earnings per share (EPS) rose from 4.4p to 7.5p. 

By my calculation, this results in a compound annual EPS growth rate of 11.25%. This is something I find very attractive indeed. 

As appealing as this growth is, the company also paid a dividend of 2p per share in 2021. At current levels, this equates to around 4.3%. It’s good to know I could derive an income stream as well as potentially enjoying growth.

I’m also of the opinion that Lloyds shares may be cheap, regardless of whether they are low or not. 

With reference to price-to-earnings (P/E) ratios, I can gain an insight into the proportion of earnings to the current share price. Lloyds has a forward P/E ratio of 6.61, lower than competitors HSBC and Citi. It’s also below the UK banking sector average, which is between 13 and 15.

To that end, I’m satisfied that buying at the current share price could provide value for money.

Rising interest rates, rising share price?

The share price has struggled to break above 50p, and I’ve long thought that this presents good value. In recent months, the banking giant has been benefiting from a climate of rising interest rates.

In the UK, rates have climbed to 1.75%. While this is still historically low, they’re increasing. In fact, Citi recently released research stating that it expects UK inflation to hit 18% next January. As such, it’s quite conceivable that interest rates will continue to rise. 

In the US, the Chairman of the Federal Reserve, Jerome Powell, has dropped strong hints that they will climb again before the end of the year.

This is generally good news for Lloyds, because it makes it possible to charge more for borrowing facilities. 

However, it can also act as a deterrent for potential customers who may find loans too expensive to justify.

The firm has already posted improved results on account of this wider economic trend. For the six months to 30 June, the company reported a 13% rise in net interest income. This is the difference between the amount paid for customer deposits against the amount charged for loans.

This is a strong suggestion that rising rates are of financial benefit to Lloyds. I therefore find it puzzling why the share price hasn’t flown above 50p. It may begin to climb soon.

Overall, I think Lloyds shares may provide value at 46p, based on the forward P/E ratio. Add to this historical earnings growth, the potential for income, and rising rates, I think that this could be a good investment for my portfolio. I’ll be adding the shares soon. 

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.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and 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

Investing Articles

1 FTSE dividend stock I’d put 100% of my money into for passive income!

If I could invest in just one stock to generate a regular passive income stream, I'd choose this FTSE 100…

Read more »

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

Forecasts are down, but I see a bright future for FTSE 100 dividend stocks

Cash forecasts for UK dividend stocks are falling... time to panic! Actually, no. I reckon the future has never looked…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Down 13% in April, AIM stock YouGov now looks like a top-notch bargain

YouGov is an AIM stock that has fallen into potential bargain territory. Its vast quantity of data sets it up…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Beating the S&P 500? I’d buy this FTSE 250 stock for my Stocks and Shares ISA

Beating the S&P 500's tricky, but Paul Summers is optimistic on this FTSE 250 stock's ability to deliver based on…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

2 spectacular passive income stocks I’d feel confident going all in on

While it's true that diversification is key when it comes to safe and reliable investing, these two passive income stocks…

Read more »

Investing Articles

The easyJet share price is taking off. I think it could soar!

The easyJet share price is having a very good day. Paul Summers takes a look at the latest trading update…

Read more »

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

9 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

As the Rentokil share price dips on Q1 news, I ask if it’s time to buy

The Rentokil Initial share price has disappointed investors in the past 12 months. Could this be the year we get…

Read more »