At 46.3p, Lloyds Banking Group’s (LSE: LLOY) share price seems to offer exceptional all-round value. Perhaps this explains why buy orders for the bank have leapt in November.
City analysts think annual earnings will dip 6% in 2022. This means the FTSE 100 bank trades on a price-to-earnings (P/E) ratio of 6.5 times.
Lloyds shares also carry a 5.3% dividend yield for this year and an even-better 5.9% one for 2023.
Should I consider buying this rising value stock for my own portfolio?
De-risked and richer
Lloyds isn’t the most exciting share out there. And it hasn’t been for some time.
A stream of asset sales following the 2008 financial crisis de-risked the company and rebuilt its battered balance sheet. They also shrunk its ability to generate impressive long-term earnings growth.
But these moves have significantly boosted the bank’s popularity as a dividend share. They’ve boosted Lloyds’ financial firepower and, as a result, its ability to return cash to its investors.
The bank’s decision to refocus on the reliable retail banking segment has trimmed the chances of wild profits swings from year to year, too. This has provided the bedrock for it to keep paying big dividends even when times get rough.
‘The Black Horse Bank’ doesn’t have an investment banking arm like Barclays. And so it isn’t exposed to a meltdown in financial markets that could occur if the world lurches into recession.
The company’s narrow geographic focus also leaves it less vulnerable to an economic shock in Asia. HSBC, on the other hand, faces turbulence as Covid-19 lockdowns (and now civil unrest) affect its Chinese marketplace.
Risky business
These defensive benefits explain why forecasters still think Lloyds will raise dividends over the next two years. But it’d be a mistake to think of the bank as a safe haven in choppy waters.
Lloyds booked more than £1bn worth of impairments in January to September alone in anticipation of soaring bad loans. And levels could continue to soar given the Bank of England’s warning of a deep recession lasting until 2024.
In this landscape, retail banks could also suffer weak revenues if, for example, the housing market slows and weak consumer spending hits credit card demand.
Cheap for a reason
I fully expect Lloyds to pay another market-beating dividend this year. But from next year I’m not sure the bank will have the means or the confidence to deliver big shareholder payouts.
City analysts think Lloyds’ earnings will rebound 3% year on year in 2023. My opinion, however, is that the bank could see yearly profits dip again given the condition of the UK economy and probable interest rate reductions from the summer.
In fact interest rates might actually be cut sooner than expected if inflation moderates and/or the domestic economy needs support. Higher rates have been a big boost to the banks’ revenues and profits in 2022.
I’d agree that Lloyds’ share price looks cheap on paper. But in my opinion this reflects the possibility of earnings (and dividends) forecasts being slashed in the months to come. All things considered I’d rather buy other FTSE 100 shares today.
