The stock market has had another mini-meltdown, triggered by the failure of two tech-focused, mid-sized US banks. This latest bout of market nerves rapidly spread from New York to London, with Lloyds Banking Group (LSE: LLOY) shares hit hard.
Bank stocks slide
Since these market tremors started last week, the FTSE 100 has lost 5.2% in five trading days. But shares in big banks — including Lloyds — suffered the most.
At its 52-week high on 9 February, the Lloyds share price peaked at 54.33p. As I write, the shares trade at 48.24p. So they’ve dived by 11.2% in under five weeks.
Here’s how this popular stock has performed over six timescales:
| Five days | -5.2% |
| One month | -10.3% |
| Six months | +1.3% |
| One year | +1.1% |
| Five years | -28.5% |
Despite falling by more than a tenth in one month, the Lloyds share price is slightly up over six months and five years. However, it has lost almost 29% of its value over the last half-decade.
This weakness leads many investors to conclude that Lloyds stock is a value trap doomed to lose money. But I take the opposite view.
It look undervalued to me
Before I buy any company’s shares, I stop to wonder whether I’d buy the entire business outright (if I had the funds).
At present, Lloyds is valued at £32.2bn. To me, that’s a modest price tag to own the UK’s biggest clearing bank, with over 26m customers. Of course, to take over the Black Horse bank, I’d need to pay a sizeable takeover premium on top, but my point stands.
What’s more, when I look at Lloyds’ fundamentals, it looks undervalued to me, even more so after this latest slide.
Right now, the shares trade on a price-to-earnings ratio of 6.7, which translates into an earnings yield of 14.9% a year. This earnings yield is over double that of the wider FTSE 100, which might suggest that the bank’s stock is a bargain.
In addition, Lloyds shareholders receive a market-beating dividend yield. Currently, the FTSE 100 offers a cash yield of around 4% a year. At 5% a year, Lloyds’ cash yield is a quarter higher.
Even better, the bank’s dividend is covered an impressive three times by earnings. To me, this wide margin of safety suggests that the dividend is both rock-solid and has room to grow.
Then again, 2023 could be a tough year for British banks. With inflation soaring, sky-high energy bills and rising interest rates, UK consumers are struggling. Thus, analysts expect bank earnings to take a hit this year from rising bad debts and loan losses.
In short, I would happily buy Lloyds shares today to keep for their dividends and future capital gains. But I won’t, only because they’re already in my family portfolio. Also, I’m awaiting the new tax year to start on 6 April before buying more stocks!
