Is now the time to be buying Lloyds shares?

As fear and uncertainty in the market have hit the financial sector in recent weeks, Gordon Best considers whether Lloyds shares are now at an attractive price.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close-up of British bank notes

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Fear in the market has continued amid uncertainty in the banking sector, rising interest rates, and a potential debt crisis in the US. With investors unsure of what’s next, many fear a stock market crash.

As with all emotional sell-offs, there are likely to be some fantastic companies now trading at a discount. So, do Lloyds shares (LSE:LLOY) fall into this category?

Volatility in the sector

The financial sector has continued to see volatility this week. With interest rates rising globally, and threat of a default in US debt, investors in all sizes of financial institutions have been incredibly nervous. Companies with larger cash reserves and diversified operations can be a relatively safe haven in such times. However, the scale of recent uncertainty and fear has impacted almost all companies.

Lloyds is certainly a large financial institution. With 26m customers globally, the company offers a range of services. These include current/savings accounts, mortgages, corporate finance, insurance products, wealth management, pensions, and investment banking. Lloyds shares have underperformed the financial sector in the last year, growing 1.1% compared to the average of 9.6%.

What is the fair value of Lloyds shares?

Analysing the fair value of banks can be challenging with traditional metrics. However, these can be useful when comparing them against competitors. To calculate the fair value of Lloyds shares, it can be helpful to use the discounted cash flow calculation. This establishes a suitable share price based on the present day value of current and future earnings. Based on this calculation, the current price of 45p is 25% below fair value of 61p.

With a price-to-earnings (P/E) ratio of 5.3 times, Lloyds shares are slightly cheaper than the broader financial sector at 6.3 times. Based on forecast earnings, the company may have further growth ahead, with a fair P/E ratio of 6.1 times.

Analysts covering the company have strong agreement that the share price will grow more than 20% in the coming year. The average price target is 39.7% above the current price. This potentially suggests that the bank is in a stronger position than many, and has been unfairly punished as smaller banks show potential weaknesses.

Is risk well managed?

Unlike some smaller banks, Lloyds clearly prioritises risk management. Most liabilities in Lloyds are made up of relatively low-risk obligations, such as customer deposits. Only 1.6% of loans are considered risky.

One concern is the recent trend of insider selling. This is where the leadership team members sell more shares in the company than they buy. This can be normal during economic downturns, but can also suggest low confidence. However, with a buyback of Lloyds shares announced earlier in the year, this seems to be unrelated.

Will I buy Lloyds shares?

With recent events in the financial sector, I expect regulation to increase. This could limit profits, making banks a less compelling investment. Systemically important banks such as Lloyds are likely to have the weight to influence the next chapter of regulation. However, I expect profits could lag those in previous years for some time.

I consider Lloyds shares to be a potentially lucrative long-term investment. However, with so much uncertainty ahead for banks, I see investments in other sectors yielding better returns. I won’t be buying Lloyds shares for my portfolio.

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.

Gordon Best has no position in any of the shares mentioned. 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.

More on Investing Articles

British bank notes and coins
Investing Articles

Should I buy M&G shares for the 9.8% dividend yield?

With the M&G dividend yield close to double digits, this existing shareholder explains why he'd happily buy more of the…

Read more »

British Isles on nautical map
Investing Articles

This cheap UK stock could rise 30%, the City says

Analysts covering Serco Group shares reckon they could rise by over a quarter. But is this UK stock a good…

Read more »

2024 year number handwritten on a sandy beach at sunrise
Investing Articles

Here’s how I’d aim for a million by investing £45 a day

Christopher Ruane thinks putting £45 a day into blue-chip shares could help him aim for a million. Here are some…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

I’d buy FTSE 100 shares in December before the next stock market rally!

Christopher Ruane explains why he would happily snap up cheap FTSE 100 shares between now and the end of the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

6% yield and 8% annual revenue growth! A passive income opportunity

Why not have the best of both worlds? Our writer explores a passive income opportunity with a 6% yield, bolstered…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’ve been loading up on this FTSE 250 share in November!

Christopher Ruane explains why he's been adding even more shares in this well-known FTSE 250 name to his portfolio this…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

Down 30%, these cheap shares are on sale!

Cheap shares don’t mean anything to our analyst unless there’s real value in what he’s buying. Let’s see his Foolish…

Read more »

Photo of a man going through financial problems
Investing Articles

I can’t believe how far these FTSE 100 shares have fallen!

While the FTSE 100 is up 0.7% over six months, these five Footsie flops have collapsed 26% to 40%. But…

Read more »