With a 5.6% yield but down 20%, are Lloyds shares too cheap to ignore?

With great H1 results, a strong core business, and a high yield that’s predicted to go higher, Lloyds shares look cheap 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 putting his card into an ATM machine while his son sits in a stroller beside him.

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.

sdf

Lloyds (LSE: LLOY) shares have dropped just over 20% from their 9 February high this year.

Much of this, I think, resulted from rumours of impending problems in the US banking sector and beyond. These rekindled investor fears of a new global financial crisis.

The little-known US Silicon Valley Bank did fail, followed by the bigger Credit Suisse. But there was no broader financial crisis.

However, UK financial stocks have struggled to fully recover. This is despite their generally very strong capital base.

I think this affords an opportunity to buy several high-quality, high-yield stocks at bargain prices, and Lloyds is one.

Strong core business

In its H1 results, pre-tax profit increased 23% year on year, to £3.9bn. Total income rose by 12% in the same period to £9bn, due primarily to higher net interest income.

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

In the latter’s case, though, Lloyds has already tried to mitigate some of the risk. A £662m impairment charge was made to cover balance sheet damage caused by the UK’s cost-of-living crisis.

Positively for the remainder of this year, the bank 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. 

Additionally positive for me is that it is looking to better balance its domestic and international presence.

Through its Corporate & Institutional business, it wants to expand its trading and origination capabilities into debt capital markets, foreign exchange, and fixed income.

Stock looks undervalued

Just because Lloyds shares have dropped 20% since their high this year does not necessarily mean they are undervalued.

To get a truer idea of its value, I examined its price-to-earnings (P/E) ratio compared to those of its peers.

Lloyds has a P/E of 5 right now. This is higher than Barclays (4.2), and NatWest (4.7). But it is lower than HSBC Holdings (6.3), and Standard Chartered (8.7).

Therefore, based on the UK bank sector average of 6, Lloyds looks undervalued.

It looks even more undervalued compared to the current European banks’ P/E average of 8.

Higher yields in prospect?

In 2022, the bank paid out 2.4p per share in dividends. With the share price at 43p now, this yields 5.6%.

The strong H1 results allowed 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%.

However, analysts’ dividend expectations are for 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%.

This would elevate Lloyds into the top tier of FTSE 100 stocks that pay 8% or more in yields. By comparison, the current average yield of the benchmark index is just 3.8%.

I already hold Lloyds stock, but I would buy it today if I did not have it in my portfolio yet. Over the long term, I think it could recoup this year’s price losses and will rising in price. I also believe that it will continue to pay very healthy yields. 


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 and NatWest 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

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

In 12 months, a £10,000 investment in easyJet shares could become…

easyJet shares have plunged in value following a profit warning on Thursday (17 July). Can the FTSE 100 travel share…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

This S&P 500 blue chip looks far too cheap to me at $183!

Our writer picks out one high-quality S&P 500 stock that is currently the cheapest among the 'Magnificent 7' group of…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Down 23% today! This one’s stinking out my Stocks and Shares ISA

Our writer's wondering what to do with a problem named Ashtead Technology (LON:AT.) in his Stocks and Shares ISA portfolio.

Read more »

Two male friends are out in Tynemouth, North East UK. They are walking on a sidewalk and pushing their baby sons in strollers. They are wearing warm clothing.
Investing Articles

Down over 20%, should I dump this FTSE 100 dividend stock?

Our writer has been loving the passive income this dividend stock has been throwing off. But does the big share…

Read more »

Businesswoman calculating finances in an office
Investing Articles

I’ve just bought this FTSE share…

Our writer explains the thought process that led to him buying this FTSE share. One that’s likely to do well…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Just over £5 now, easyJet’s share price looks cheap to me anywhere under £13.84

easyJet’s share price has dropped recently, which could mean the business is worth less than before. Conversely, it could mean…

Read more »

Trader on video call from his home office
Investing Articles

36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock?  

This FTSE 250 firm is a leader in a growing sector and has secured several new sites to drive its…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

3 UK shares that have recently become takeover targets

Mark Hartley examines why these three UK shares have become takeover targets and could be bought out by rivals in…

Read more »