After sliding 11%, Lloyds shares look too cheap

After falling over 11% in under five weeks, Lloyds shares are looking increasingly undervalued to me. Indeed, I can see them hitting higher highs in 2023.

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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!

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.

Cliff D’Arcy has an economic interest in Lloyds Banking Group shares. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.

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