Lloyds shares look dirt cheap. Am I missing out by not buying?

At 42p, this Fool thinks Lloyds shares could be a steal. Here, he details why he’d be rushing to buy the Black Horse Bank today if he had the cash.

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Investors who purchased Lloyds (LSE: LLOY) shares five years ago have been on some journey. Back then, a share in the Black Horse Bank would have set me back 54p. A share in late 2019 would have cost me 64p.

Today, however, I’d only have to fork out around 42p. And with that, I think Lloyds shares look cheap.

Building for the future

I’m always looking out for a bargain. And right now, I’m looking to spend any of my excess cash on UK shares.

I think Lloyds could be a smart option. To start, the business is making moves that I as an investor look for. By this, I mean planning for the long term. Through a £3bn strategic investment made early last year, Lloyds plans to diversify its revenue streams. CEO Charlie Nunn labelled the move as “an exciting new chapter” for the business. As part of this, the bank plans to increase investment in areas including IT transformation to upgrade its digital capabilities.

What’s more, Lloyds stock looks cheap. It’s traded at around just below five times earnings over the past year. And it has a forward price-to-earnings of around 6. On top of that, its price-to-book ratio, which measures a stock’s price relative to the value of its assets, sits at just 0.6.

UK exposure

Before we move on, let’s get any potential issues I have out of the way. What is of concern is the firm’s exposure to the UK economy. With its sole focus on domestic activities, this leaves it more prone to these economic fluctuations as opposed to its global competitors.

With its performance linked closely to the British economy, any signs of stagnation or decline are likely to see the Lloyds share price suffer. Recently it was announced by the Bank of England that the UK economy was not likely to see growth until 2025.

On top of that, due to its position as one of the UK’s largest mortgage lenders, predictions that house prices won’t stop falling until 2025 may also be an issue.

Extra cash

With that said, as I continue to slowly build up the size of my investment pot, I’m searching for ways to speed this process up. As such, the passive income that Lloyds provides is a further attraction.

A 6% dividend yield cements it comfortably above the average of its FTSE 100 peers. With the government clamping down on banks regarding offering low interest rates on savings accounts, it also trumps leaving my cash in the bank.

Of course, I’m aware that dividends can be reduced or, even worse, cut altogether. We saw this during the pandemic. And with an unstable economic environment, this is something worth considering. However, with Lloyds’ dividend covered around three times by earnings, I think a payout seems safe.

Silly not to buy?

So, am I missing out by not buying at this price?

Well, I think there’s certainly a case to be made. The next few months could be choppy. A flagging UK economy could impact Lloyds.

However, I like the moves the business is making for future success. With a low valuation and high yield, I’m further enticed. If I had some spare cash lying around, I’d be buying some Lloyds shares.

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.

Charlie Keough 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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