When share are cheap, but drift along for years or decline, they often get called ‘value traps’. This seems to be the case for Lloyds Banking Group (LSE: LLOY) shares. Indeed, the Lloyds share price has gone nowhere for five years and more. What would it take to escape this rut?
A long-term lemon
Here’s how the Lloyds share price has performed in the short and medium term, based on the share price of 46.24p as I write:
| One day | -0.2% |
| Five days | -1.1% |
| One month | +10.1% |
| Six months | +1.5% |
| 2022 YTD | -3.2% |
| One year | 0.0% |
| Five years | -30.7% |
Despite leaping almost a tenth over the past month, the price trend of Lloyds shares seems relentlessly downwards. Though they’re largely unchanged over the past year, the shares have lost more than three-tenths in value over the last half-decade.
Over five years, the FTSE 100 index (of which Lloyds is a member) has risen by 2%. However, these returns all exclude cash dividends, which adds a few percentage points a year to these results. Even so, there’s no arguing that, since 2017 and before, Lloyds has been a lemon.
2023 will be tough
At its 2022 high, the Lloyds share price peaked at 56p on 17 January. But after repeated setbacks — including Russia’s invasion of Ukraine — it now stands almost 10p below this mark. Maybe there’s too much pessimism surrounding the group’s prospects, acting as a drag on its shares?
I can understand why many investors steer clear of Lloyds stock. After all, a recession in 2023 looks highly likely. Consumer confidence is in the doldrums, crushed by surging inflation and sky-high energy bills. And with interest rates climbing, paying mortgages and loans will be much harder next year.
We bought Lloyds shares. Here’s why
My wife bought into Lloyds in late June. But with recession imminent and doom and gloom on the horizon, why invest in the UK’s largest lender to individuals and businesses?
My first point is that the Black Horse bank is much stronger now than it was during the global financial crisis of 2007-09. Today, UK banks have rock-solid balance sheets packed with high-quality, liquid assets (such as developed countries’ bonds).
Second, as interest rates go up, so does Lloyds’ net interest margin (lending margins minus savings rates). As the UK’s largest mortgage lender, this widening margin could add billions to the bank’s future profits.
This share looks cheap on fundamentals
Third, I still regard Lloyds stock as undervalued on these basic fundamentals:
| Market value | £31.1bn |
| Price/earnings ratio | 7.7 |
| Earnings yield | 13.1% |
| Dividend yield | 4.6% |
| Dividend cover | 2.8 |
The price-to-earnings ratio is almost half that of the wider FTSE 100, making its earnings yield one of the highest in the Footsie. Also, its dividend yield of 4.6% a year is around 1.3 times the blue-chip index’s cash yield.
Finally, Lloyds’ dividend is covered almost three times by earnings. This is a huge margin of safety. For me, it indicates that the company’s dividend is solid, plus it has scope to rise. And that’s why we’ll hold these shares tightly for many years to come!
