The recent performance of the Lloyds (LSE:LLOY) share price will no doubt have left investors disheartened.
Macroeconomic uncertainty and rising interest rates partly account for the shares losing almost 7% of their value in the last month.
Over the last six months, the bank’s share price has fallen from around 53p to 42p. That’s a drop of approximately 21%.
But in my view, beyond recent share price volatility lies a range of factors that could position Lloyds as a prime candidate for value investors like me.
As such, I’m highlighting three reasons why I’m convinced Lloyds shares could be among the FTSE 100‘s best bargains.
1. A solid financial performance
Despite a challenging operating environment, Lloyds delivered a robust financial performance in the first half of 2023. Results released towards the end of July give me plenty of reasons to remain cautiously optimistic.
For example, pre-tax profit rose nearly 25%, while net income jumped 11% to £9.2bn. On top of this, underlying net interest income rose by 14%.
However, operating costs went up by 6% to £4.4bn and the underlying impairment charge grew by 76% to £662m.
As such, I’m keenly aware of the risk this poses to the bank’s profitability and overall financial stability moving forward.
2. A juicy dividend yield
Lloyds currently boasts an attractive dividend yield of 5.7%.
Additionally, the ongoing £2bn buyback is nearing completion. This means the number of shares in issue will continue to decrease, which is likely to support future share price appreciation by increasing earnings per share (EPS).
The return of excess capital to shareholders is especially beneficial for those looking for income since the reduction in shares means that each remaining shareholder owns a larger portion of the company.
As a result, shareholders could potentially receive higher dividends or enjoy greater ownership value.
However, dividends are never guaranteed and this holds true even for established companies like Lloyds.
For example, in response to the economic uncertainty and financial challenges posed by the pandemic, group announced the suspension of dividend payments.
3. A seriously undervalued stock
Earlier in August, the independent investment group Shore Capital reiterated its ‘buy’ ratings on six UK-listed banking stocks, including Lloyds.
They’re convinced that the market is currently pricing in a far worse outlook than necessary. According to their analysts, banks such as Lloyds have encouraging outlook statements despite various ongoing concerns.
I’m inclined to agree. To illustrate, the group currently trades on a forward price-to-earnings (P/E) ratio of around 5.7.
This relatively low ratio suggests to me that the market has seriously undervalued Lloyds shares.
While this is likely due to a range factors such as temporary market sentiment, concerns about the banking sector’s performance, or broader economic uncertainties, I see it as an opportunity to hoover up some shares at a discount.
In my view, the market’s perception of the value of Lloyds shares has to improve eventually provided the group can continue to drive revenue growth and diversification while simultaneously strengthening cost and capital efficiency.
