Is the Lloyds share price high enough now?

Fundamental measures suggest the Lloyds Banking Group share price is too low. Here are some reasons why it might stay that way.

| More on:
Stack of British pound coins falling on list of share prices

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.

Every time I look at the Lloyds Banking Group (LSE: LLOY) share price, I just think it’s too low.

The trouble is, I’ve thought that for years. But the market, stubborn as it is, just won’t listen to me. Or is it me who should listen to the market?

Now Lloyds shares have moved ahead in the past couple of months, and hover around 50p, it’s time to ask myself one key thing. Is that as far as they’re likely to go, at least for now?

Looking cheap?

On fundamental measures, Lloyds shares still look cheap. There’s a forecast price-to-earnings (P/E) ratio of nine, dropping to six on 2026 forecasts. And a 5.4% dividend yield, which could approach 7% in that time. These suggest the price is too low.

Measures that are perhaps more useful to bank investors look bright too. We’re looking at a price to book ratio, which gives us an idea of a stock valuation compared to underlying assets, of about 0.8.

So Lloyds is worth less than the value of its assets? The future of its actual business isn’t worth anything?

On a related measure, the board expects a return on tangible equity of around 13 for 2024. In bank valuation terms, that’s strong.

Not all roses

But it can’t all be this good, right? Well, no, it isn’t. A few things count against Lloyds right now.

First is the prospect of interest rates cuts. They’d affect Lloyds business, like mortgage lending and general retail banking, in different ways. But the net result should be lower lending margins.

Then the forecast return on equity is below 2023’s figure. And there’s a good chance that 2025’s will be lower again.

And unlike some other banks, Lloyds no longer has any investment banking business to boost its profits. The 2008 bank crash showed how risky it can be. But at the same time, it’s potentially lucrative.

Regulation

UK banking regulations are a lot stronger now. So investment banking risk should be lower. But it might be a reason why Barclays, still big in that business, might be more profitable in the next few years.

Or why HSBC Holdings, with its focus on the China region, could have greater long-term appeal.

And speaking of regulation, Lloyds is preparing itself for a potential penalty. It’s just set aside £450m on the back of car loan mis-selling claims from the Financial Conduct Authority (FCA).

Doesn’t it seem like there’s some sort of banking scandal round every corner? It’s not helping sentiment towards the sector.

Share price

I’m no good at short-term predictions, so please just take this as a guess. But I really could see the Lloyds share price not getting much above 50p for at least the next couple of years. Until the economy settles, and we get a sight of the longer-term outlook.

But I wouldn’t mind that. I’d be happy to keep taking the dividends. And maybe buy some more 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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, 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

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

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

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »