At 41.5p, is the Lloyds share price now irresistibly cheap?

The Lloyds share price offers a twin bonus of low P/E ratio and 7%+ dividend yield. But is the FTSE 100 stock worth the risk even at current prices?

| 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.

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

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.

Britain’s listed high street banks have got 2024 off to a truly miserable start. Lloyds Banking Group (LSE:LLOY), for instance, has endured a 13% share price decline since New Year’s Eve.

The FTSE 100 bank has now lost almost all the gains it printed at the back end of last year. Hopes of profits-boosting interest rate cuts over the spring have given way. The market now fears a prolonged period of weak loan growth and high impairments.

However, I’m looking again at Lloyds shares and considering whether now could be a good time to open a position. This is because I buy shares based on what returns I can expect over the long-term (ie a decade or more). If the case is compelling enough on this basis, I’m happy to accept some temporary pain.

Lloyds’ recent share price decline is certainly attracting the attention of many other bargain hunters. The Footsie bank was the third most-purchased share among Hargreaves Lansdown investors in the seven days to 15 February.

It was also the sixth most popular buy with people using AJ Bell‘s trading platform.

At first glance it’s easy to see why. At 41.5p per share, the Black Horse Bank currently trades on a forward price-to-earnings (P/E) ratio of 6 times, way below the Footsie average of 11 times.

Meanwhile, the company’s dividend yield for 2024 sits at 7.7%. This soars above an average of 3.9% for FTSE 100 shares.

Risk vs reward

Some stocks command rock-bottom valuations for a reason however. And in the case of Lloyds shares, I think the risks of ownership may outweigh the potential benefits.

As I say, I’m someone who purchases shares for the long haul. But it’s difficult to ignore the upheaval that UK-focused banks like this face in the short-to-medium term.

The British economy is locked in a period of low-to-no growth at the moment. In fact, it’s now in recession territory after official data showed GDP reverse by a worse-than-forecast 0.3% in the final quarter of 2023.

In this scenario it’s tough to see how the likes of Lloyds can grow earnings. And especially as digital and challenger banks continue to expand their product ranges to poach the big banks’ customers.

At the same time there’s no certainty that interest rates will be reduced to help the ailing economy. Monetary Policy Committee member Megan Green has just warned monetary policy may remain “restrictive for some time” even if inflation falls to the Bank of England’s 2% target.

This would put further stress on people trying to repay their loans and deal a hammerblow to credit demand.

Here’s what I’m doing

Unfortunately, there’s no obvious catalyst in sight for the British economy either. Falling productivity, worker shortages, high public debts and regional disparities are just a few major obstacles to growth.

As a consequence, the likes of Lloyds may struggle to deliver meaningful capital gains over the long term.

On the plus side, the bank’s strong balance sheet means it may continue to pay market-beating dividends for the next few years, at least. But the possibility of some more large payouts isn’t enough to tempt me to invest.

All things considered, I think there are much better FTSE 100 value stocks for me to buy right now.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell Plc, Hargreaves Lansdown Plc, and 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.

More on Investing Articles

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

2 overlooked cheap shares I’m tipping to eventually soar

These two cheap shares may not be obvious bargains, but our writer explains the investment case behind buying them for…

Read more »

Investing Articles

1 no-brainer pick I’d love to buy for my Stocks & Shares ISA!

A Stocks & Shares ISA is a great investment vehicle for our writer. Here she explains why, and one stock…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Just released: our 3 best dividend-focused stocks to buy before May [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Will the Rolls-Royce share price keep rising in 2024?

With the Rolls-Royce share price going on a surge, this Fool wants to look forward to where it could potentially…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d target a regular £30k+ second income stream

Reliable dividends can help provide a lot more financial freedom. Here's how I'd aim for a substantial second income inside…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Lloyds share price hanging on to 50p ahead of Wednesday’s Q1 earnings report. Where to now?

Down in April and with low earnings expected this week, Mark David Hartley investigates where the Lloyds share price might…

Read more »

artificial intelligence investing algorithms
Investing Articles

Everyone’s talking about AI! Here’s 1 FTSE stock to consider buying for exposure

A hot topic right now is artificial intelligence (AI). This Fool explains how this FTSE stock could offer investors an…

Read more »

British Pennies on a Pound Note
Investing Articles

1 penny stock I’d buy today while it is 99p

Ben McPoland highlights Windward (AIM:WNWD), a fast-growing penny stock that could benefit from the artificial intelligence revolution.

Read more »