At just under 42p, is Lloyds’ share price a prime FTSE 100 bargain?

Lloyds’ share price at just under 42p looks a bargain, with the bank having good fundamentals and dividends, but it might pay to wait a bit before buying.

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Since 3 November last year, the Lloyds (LSE: LLOY) share price has not dipped decisively under 42p. In technical analysis terms — a cornerstone of many institutional algorithmic trading models – it is a major support level. This is a price that historically has seen buying heavily outweigh selling.

Technical analysis uses past market data to attempt to forecast future prices. Algorithmic trading is when computer algorithms execute trades based on pre-determined rules. Such trading by banks and fund managers often leads to major moves in asset prices.

A decisive break of a support level often means further losses until it hits the next support point. In Lloyds’ case, this is 39p, hit on 9 March last year. After that comes 32p, seen on 1 February 2021.

Currently, Lloyds shares are trading at a mid-market price of just under this crucial 42p level.

There are less immediate risks in the stock as well, of course. One is that enduring high interest rates cause a major ongoing rise in loans turning bad. Another is a global banking crisis of the sort seen in 2007.

Is Lloyds a bargain?

Even at the current price, though, Lloyds looks a bargain to me. Its price-to-earnings (P/E) ratio of 4.9 is lower than the current UK sector average of 5.9.

This includes Barclays (4.1), NatWest (4.8), HSBC Holdings (6), and Standard Chartered (8.7). And all these FTSE 100 banks trail the benchmark index’s present average P/E of 10.8.

Its fundamentals are supportive of this view to me. H1 results showed pre-tax profit up nearly 25%, to £3.9bn compared to £3.1bn the same time last year.

Net income also rose, by 11%, to £9.2bn. The return on tangible equity (ROTE) for the half was 16.6% against 11.8% in the same period in 2022.

The bank now expects its net interest margin to be over 310 basis points and ROTE to be greater than 14%. This margin is the difference between earnings from loans made and payouts for deposits taken in. 

Lloyds has additionally tried to pre-empt any significant deterioration this year in its operating environment. This has been done through a £662m impairment charge to cover potential bad loans arising from the UK’s cost-of-living crisis.

Dividend increase

These strong results enabled the bank to announce an improved interim ordinary dividend of 0.92p per share. This is up 15% from 2022, which at that time produced a final yield of 5.3%.

This may become even better, with consensus analyst dividend expectations of 2.67p, 2.9p and 3.34p for 2023, 2024 and 2025, respectively.

If the share price stayed where it is now, the payouts would be 6.4%, 6.9% and 8%. This compares to the current average FTSE 100 yield of around 3.9% and forecasts next year of around 4.2%.

Like all long-term investors, technical analysis is not at the forefront of my stock-picking process. However, in choosing when to enter or exit stocks, it does play a part.

I already hold Lloyds shares bought around this very level, at which I think they represent a bargain. But if I did not, I might wait to see what happens next at this critical 42p point.

Even a slight dip in the price might trigger a larger move lower and an even better bargain, I think.

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.

Simon Watkins has positions in Lloyds Banking Group Plc. 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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