At just 47.1p, it can’t be only me who thinks the Lloyds (LSE: LLOY) share price looks like a steal. I’m a shareholder in the Black Horse Bank. But at its current price, I’m very tempted to top up my position. Is that a smart idea?
A rough patch
Well, looking at its performance across the last five years signals it might not be. Back then, I would have forked out nearly 55p for a share in the business. In December 2019, a share would have cost me over 64p!
So, clearly, it’s not been the best period for Lloyds. And while past performance is no indication of the future, there’s potential that it’ll continue to struggle in the months ahead.
The biggest risk I see for the firm is its dependence on the UK economy. Where a host of its competitors, such as HSBC, have overseas operations, Lloyds doesn’t. This makes it more prone to a downfall in the domestic economy. With low growth forecast in 2024 and 2025, this could spell trouble for the business.
To add to that, as the UK’s largest mortgage lender, its performance is also closely tied to the housing market. Any signs of weakness could cause the stock to fall.
Attractive fundamentals
So, I’ll admit, Lloyds stock hasn’t posted the strongest performance in the last few years. But that’s in the past. Surely, I should be more focused on where it’ll head in the next five years, right?
Well, to do that, there are a few factors to consider. The first of these is its fundamentals. Short-term investing can be swayed heavily by investor sentiment. However, for long-term investing, I deem valuation very important. Currently, Lloyds trades on a trailing price-to-earnings (P/E) ratio of around 6.5. To me, that looks incredibly cheap. Comparing it to the FTSE 100 average of 11 and global sector average of 10 only reinforces this.
On top of that, I’m attracted due to its price-to-earnings-to-growth ratio. This is calculated by dividing a company’s P/E ratio by its forecast earnings per share growth rate. For Lloyds, this sits at around 0.5. This implies the stock is undervalued by around half.
Extra funds
There are other reasons I’m bullish on the stock. I’m an income investor. With every investment I make, I’m keen to generate passive income on the side. It’s a simple way to generate some extra cash. With that cash, I can reinvest. When the day comes, I can then draw it as income to fund my lifestyle.
With a dividend yield of 5.3%, Lloyds offers the opportunity for me to do this. While dividends are never guaranteed, its payout is covered two times by earnings. I hold my shares in the hope of their prices rising, but I’m happy to collect some additional money along the way!
A bargain?
So, at their current price, are Lloyds shares a steal?
I’d argue so. I’m not expecting its share price to take off in 2024. Instead, I’m bracing myself for further volatility. But with its low valuation and substantial yield, I think Lloyds has large potential to be a smart investment. With any spare cash, I’ll be topping up my holdings.
