Is the Lloyds share price the best bargain in the FTSE 100? 

Down 20% this year, but with great H1 results and international expansion plans, the Lloyds’ share price looks to be at a bargain level to me.

| 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.

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

The Lloyds (LSE: LLOY) share price has now recovered to above its long-term ‘support level’ of 42p. This is a price that historically has seen buying heavily outweigh selling.

This said, it is still trading 20% lower than its 9 February high this year of 54p.

Are the valuations compelling?

Currently, the ‘Big Four’ UK bank trades at a price-to-earnings (P/E) ratio of five. This is higher than FTSE 100 peers Barclays (4.4), and NatWest (4.9). But it is lower than HSBC Holdings (6.3), and Standard Chartered (8.9).

Based on the peer average of 6.1, Lloyds looks notably undervalued to me.

It looks even more so compared to the current European banks’ P/E average of 7.8.

Core business looks strong

Lloyds’ H1 results support this view, I feel. Pre-tax profit increased nearly 25%, to £3.9bn compared to £3.1bn the same time last year. Net income also rose, by 11%, to £9.2bn.

H1’s return on tangible equity (ROTE) was 16.6% against 11.8% in the same period in 2022.

Additionally positive is that the bank now expects its net interest margin to be over 310 basis points. This margin is the difference between earnings from loans made and payouts for deposits taken in. 

There is a risk here, of course, that interest rates peak and then fall sooner than expected, so reducing profits. Another is that existing high rates may cause more loans to turn bad.

In the case of the latter, though, Lloyds has already tried to mitigate some of this risk. This has been done through a £662m impairment charge to cover balance sheet damage caused by the UK’s cost-of-living crisis.

Another positive for me is that Lloyds is looking to better balance its domestic and international presence.

Through its Corporate & Institutional banking business, it wants to expand its trading and origination capabilities across several markets. These include debt capital markets, foreign exchange, and fixed income. 

This might widen the scope of international investors interested in buying its stock, I think.

A future dividend star?

In 2022, the bank paid out 2.4p per share in dividends. This gave a yield of 5.3% at the time.

Its strong H1 results enabled it to increase its interim ordinary dividend by 15% — to 0.92p. If this increase was applied to the final dividend, the yield on a share price of 43p would be 6.4%.

This may become even better, with analysts’ dividend expectations of 3.12p, and 3.52p for 2024 and 2025, respectively. If the share price stayed where it is now, the payouts would be 7.3% and 8.2%, respectively.

This would elevate Lloyds into the rarefied tier of top FTSE 100 stocks that pay 8% or more in yields. By comparison, the current average yield of the benchmark index is 3.9% only.

I already have holdings in Lloyds and buying more would make it too big in my portfolio. But if I did not, then I would buy it now for its current yield and future yield potential.

I also think that share price gains may be made over time. Together, I think these opportunities make the Lloyds price one of the best bargains in the FTSE 100.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Simon Watkins has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered 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

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

3 top FTSE 100 value shares I’d buy before August!

These FTSE 100 heavyweight shares have considerable long-term potential. And at current prices, I think they are too cheap to…

Read more »

Investing Articles

Here’s why I’m selling my Lloyds shares to double down on this FTSE 100 stock

Our writer digs into why he prefers HSBC over Lloyds shares right now, despite both performing really strongly in recent…

Read more »

Investing Articles

I’d invest £12,500 in this 1 stock to bag £1K of passive income!

Building a passive income stream through dividends is one of this writer’s biggest ambitions. Here’s how one stock could help.

Read more »

Investing Articles

3 cheap stocks to consider buying for the AI revolution

Investors looking for AI stocks to buy might be worried about high valuations amid current market euphoria, but these three…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Earnings up 20%! But this UK small-cap stock may just be getting started

Are we about to see enduring growth from this UK small-cap business with a rising stock price ahead over the…

Read more »

Investing Articles

1 FTSE 250 stock I’d give a wide berth… for now

One of the worst performers on the FTSE 250 index is a stock that Sumayya Mansoor has decided she won’t…

Read more »

Investing Articles

The FTSE 250 is brimming with potential, especially in stocks like this one

The main Footsie index gets all the attention but its little brother, the FTSE 250, is full of growth potential.…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

What on earth happened to the Premier African Minerals (LSE:PREM) share price?

The Premier African Minerals (LSE:PREM) share price is down a whopping 85% in the last year, so what happened? Gordon…

Read more »