It’s been another rough month for long-suffering owners of Lloyds Banking Group (LSE: LLOY) shares. The stock has fallen hard from mid-summer highs and has dived nearly a tenth in a month. But I see light at the end of a long tunnel for patient shareholders.
Lloyds shares are losers
Not only has the Black Horse bank’s share price lost ground this year, it’s also persistently lagged behind the wider FTSE 100 index for ages. Here are the stock’s returns versus the Footsie over six different timescales:
| Change over | Lloyds | FTSE 100 | Difference |
| Five days | -3.8% | -1.5% | +2.3% |
| One month | -9.6% | -4.1% | +5.5% |
| Six months | -16.9% | -7.4% | +9.6% |
| 2023 to date | -11.8% | -2.2% | +9.7% |
| One year | -3.0% | +3.5% | +6.5% |
| Five years | -32.7% | +2.8% | +35.5% |
Over all six periods, ranging from five days to five years, Lloyds shares have lost ground. What’s more, over half a decade, they have dived by nearly a third. While the FTSE 100 has hardly been a star since late 2018, it’s pretty clear that the Lloyds share price has been a dog.
Even so, I’m genuinely surprised that the stock has dropped below 40p again, given its 52-week high was 54.33p on 9 February. But then a crisis at mid-sized US banks sent financial shares plunging worldwide, from which many have yet to recover.
Lloyds stock hits 2023 lows
As I write — on 27 October — Lloyds shares have just closed at 39.76p, valuing the bank at £25.4bn. This leaves the stock just 0.9% above its 52-week low, set on Tuesday, 24 October. Yikes.
Yet these lows come after the group beat analysts’ third-quarter profit forecasts, helped by lower loan losses. The latest impairment charge for bad debts plunged to £187mn, from £668mn in Q3 2022.
However, the bank warned that the boost to income it had enjoyed from higher interest rates was starting to slip. Its net interest margin — a key measure of group profitability — slipped to 3.08%, versus 3.14% in the second quarter.
Even so, the UK’s largest lender made a statutory profit before tax of £1.9bn in Q3, beating estimates of £1.8bn. However, Lloyds is often seen as a bellwether for the UK economy. And with consumers stressed by higher interest rates, stubborn inflation, and sky-high energy bills, banks face strong headwinds.
Value trap or recovery play?
Given their relentless underperformance, it’s hard to be positive about Lloyds shares. Still, all trends must come to an end, so this might be the low for shareholders. Indeed, with £2.5bn of spare capital at hand, the board will consider even higher cash dividends and more share buybacks in 2024.
Also, trading on a multiple of 5.6 times earnings, Lloyds stock produces an earnings yield of 17.9%. This is enough to cover the generous 6.3% dividend yield by 2.8 times. That’s a healthy margin of safety, plus analysts expect this yearly cash yield to rise to 7%.
Summing up, I see Lloyds shares as an undervalued recovery play for 2024/25. What’s more, I would gladly buy a ton of stock today, had my wife and I not already bought a stake for 43.7p a share in June 2022!
