Shares in Lloyds Banking Group (LSE:LLOY) are trading at around 47p. And with the company’s earnings per share coming in at 7p, this implies a price-to-earnings (P/E) ratio of 6.5.
It’s unusual to find shares in the UK’s largest retail bank trading at these levels. The only time in the last 10 years the price was lower for a significant period was in 2020, when earnings per share were 1p.
Part of the reason for the low prices is the uncertainty around bank stocks at the moment. But could this be a once-in-a-decade opportunity to buy Lloyds shares at a bargain?
Interest rates
If I’d invested £1,000 in Lloyds Banking Group (LSE:LLOY) shares 10 years ago, my investment would have a market value of £967 today. But I’d also have received £357 in dividends, giving me a total return of £1,324.
That amounts to a 2.85% annual return, which isn’t massively impressive. But one of the main reasons the stock has underperformed has been low interest rates in the UK – and that has been changing lately.
Along with other UK banks, the company has had to contend with more than a decade of interest rates below 1%. But the Bank of England has increased them from 0.1% at the start of 2022 to 4.25% today.
Higher rates typically allow banks to generate better returns in their lending operations. And this has been the case for Lloyds in 2022.
Rising interest rates aren’t unqualified good news for banks, though. As well as the potential for higher margins, they also increase the risk of loan defaults.
For 2023, Lloyds is expecting higher rates to be a challenge, rather than a tailwind. But over the long term, I expect the company to benefit from the highest interest rate environment the UK has had for over a decade.
Outlook
So is this a once-in-a-decade opportunity to buy Lloyds shares? I think it might be – at today’s prices, the stock has a dividend yield in excess of 5%.
Relying solely on dividends isn’t a great idea, though. A £1,000 investment a decade ago would have returned 3.57% per year in dividends, but the falling share price would have cut into the total return.
As I see it, there are a couple of important differences between the situation in 2013 and the situation today. First and foremost, the stock looks much more attractive from a valuation perspective than it did 10 years ago.
In 2013, the bank reported a loss of 1p per share, compared to a 7p profit in 2022. That might not sound like a lot, but it’s a significant difference in the context of a business with a 47p share price.
I’m also expecting Lloyds to be reasonably well-protected from the issues that have caused the recent bank failures. With the largest share of retail deposits in the UK, its liquidity looks secure to me.
Overall, a low P/E ratio, a solid dividend, and a promising interest rate outlook make this a stock worth looking carefully at. I don’t think there’s been a better time to buy Lloyds shares in the last 10 years.
