Lloyds (LSE: LLOY) shares dipped below 50p in March, but the current 45p share price looks undervalued to me. Here’s why I think the FTSE 100 bank might surge soon.
Overblown panic
The first reason I can see Lloyds shares shooting up is due to the recent banking crisis. It’s true there’s a lot of panic in the financial sector, but I think its impact on this side of the Atlantic is overblown. The real crisis happened in America where lenders like Silicon Valley Bank and First Republic became insolvent. It did affect UK banks as Lloyds, HSBC, NatWest and Barclays all saw double-digit share price losses. But the core businesses were unchanged. And Lloyds, in particular, has little international exposure compared to the rest of the big four. All in all, a 17% drop this year doesn’t seem justified to me.
Dividends
A second reason is the black horse bank’s dividend guidance, which looks too juicy to ignore. The forward yield has been bumped up to a 7% return. That’s nearly double the FTSE 100 average of 3.75% and it also puts Lloyds as one of the top 10 Footsie dividend payers. I’d usually expect investors to flock to such a high dividend and drive up the share price, so why hasn’t it happened already?
Well, sometimes we see significant risks associated with high dividend payers, but I don’t think that’s the case here. Revenue and income are both increasing and are the highest they’ve been for 10 years. And in terms of valuation, Lloyds trades at under six times earnings. That’s in line with the industry average and some way below the FTSE 100 average of around 14. This suggests to me a 45p share price isn’t long for this world. Analysts agree, with an average price target of 69p.
Is it a buy?
I own shares in Lloyds already, but the above reasons suggest picking up more might be a smart move. So what’s putting me off?
Well, higher interest rates are a boon for banks as they can take a bigger slice from products like savings accounts. This is one reason for those increased earnings. However, they won’t stay this high forever. And further down the line, the bank may suffer from more defaults on its loans.
Also, while I think the recent banking crisis is overblown, the sector does have a chequered history. The 2008 Great Financial Crisis is an obvious example, and Lloyds only stayed afloat then by massively diluting shareholders. There’s always a chance of that in the future.
Still, I’d say the good outweighs the bad here. I’m happy to hold my current position in Lloyds looking at the evidence. And if I had spare cash to invest, I think I’d buy more shares.
