The Lloyds share price is 28% below target price! Opportunity beckons?

It’s not been a bad month for this banking giant, with the stock up 9%. However, is the Lloyds share price really still undervalued?

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The Lloyds (LSE:LLOY) share price jumped in February after the company’s annual earnings report. The lender reported a 57% jump in full-year profits, above expectations, and announced another £2bn share buyback.

But even with the share price lifting 9% during the month, the stock’s valuation is still some distance below analysts’ assessment of fair value. Let’s take a close look.

Share price target

The share price target represents the anticipated value of a stock within a specified time frame. This is based on various factors such as company performance, industry trends, and market conditions.

It serves as a benchmark for investors and analysts to assess the potential return on investment and make informed decisions. In this case, using a pool of analysts covering Lloyds, we come to an average target price of 58.8p.

Obviously, it’s a good sign that analysts thing a company should be worth more than it is. And, thankfully, in the UK at least, there are lots of stocks trading below their target prices. That’s largely because there’s a lack of momentum in the UK as well as lower levels of investor sentiment.

So Lloyds is currently trading at a 28% discount to the average share price target. This doesn’t mean the stock is definitely 28% undervalued, but it’s a good indicator that the stock is miss-priced. I’d couple that with the fact that only one brokerage has a sell / outperform verdict on the stock.

Results impressed

As noted, in February Lloyds reported a 57% increase in full-year profits, with £7.5bn in pre-tax earnings for the year ending 31 December 2023.

And despite a 4% decline in fourth-quarter profits due to mortgage pricing and deposit mix challenges, the company announced a full-year dividend increase of 15% to 2.76p per share. In turn, this has pushed the dividend yield right up to 5.96%, putting it right up at the high end of FTSE 100 dividend payers.

However, Lloyds set aside £450m for a regulatory probe into UK motor financing, reflecting concerns over potential misconduct. This provision, likened to the PPI scandal, could signal significant uncertainty for investors. It also may distract from the CEO’s strategy of expanding digital banking and wealth management arms.

Moreover, the £450m set aside is considerably less than some of the estimated size of the fine by other analysts. Some have suggested Lloyds could be slapped with a £2bn fine. But perhaps its reassuring to see Lloyds setting aside less than that. After all, you’d hope they know their exposure.

The bottom line

Lloyds might not be as exciting as Silicon Valley firms like Super Micro or Nvidia, but I see it as an essential part of my portfolio. Moving forward, I expect the company to continue delivering and beating expectation.

There are several tailwinds to bear in mind. One of which is the value of Lloyds hedging programme — essentially that’s buying high yield bonds and other assets when interest rates are high. Amid falling interest rates, this hedging could be worth more than £5bn in revenue next year.

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.

James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Nvidia. 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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