Is Lloyds’ share price REALLY that cheap? I don’t think so!

Lloyds’ share price continues to attract attention from value chasers. But our writer Royston Wild thinks the bank could be a costly investment trap.

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At first glance, the Lloyds Banking Group (LSE:LLOY) share price offers outstanding value, at least on paper.

The Black Horse Bank trades on a forward price-to-earnings (P/E) ratio of 8.7 times. This is comfortably below the FTSE 100 average of 11 times. Its dividend yield of 5.8%, meanwhile, soars above the Footsie average of 3.5%.

But scratch a little deeper, and suddenly the FTSE bank doesn’t seem like a brilliant bargain. So just how cheap are its shares? And what should I do now?

Earnings

Sometimes, comparing a stock’s P/E ratio to that of a wider index is like comparing apples and oranges. The Footsie’s made up of a wide range of industries, each having different growth expectations, risk levels, and economic cyclicity, among other factors.

As a result, it’s a good idea to also compare how Lloyds shares compare with those of other major banks in terms of value. Here’s what my research shows.

BankForward P/E ratio
NatWest Group 7.9 times
Barclays 6.9 times
Standard Chartered 6.1 times
HSBC Holdings 7.1 times
Banco Santander 6.6 times
Lloyds Banking Group 8.7 times

As you can see, Lloyds is more expensive than each of its London-listed rivals, based on predicted earnings. Among this entire grouping, the average P/E ratio is 7.2 times.

It’s important to note that the difference isn’t gigantic however. Also, remember that these are based on broker forecasts rather than actual earnings (unlike trailing earnings multiples).

Dividends

Next is to see how cheap Lloyds looks, based on dividends. Here, the outcome’s far more encouraging.

BankForward dividend yield
NatWest Group 5.2%
Barclays 3.9%
Standard Chartered 3.1%
HSBC Holdings 10%
Banco Santander 4%
Lloyds Banking Group 5.8%

Aside from HSBC — whose forward dividend yield is in double-digits — the company beats each of its major rivals on this metric. The average dividend yield among this group stands at 5.3%.

Like earnings, these dividend yields are based on City estimates rather than concrete numbers.

The verdict

So what would I do next? Clearly, Lloyds could be a great buy if I was looking for a large passive income in 2024.

In fact, it could be a good dividend payer beyond this, with City analysts predicting steady dividend growth through to 2026, at least.

But there’s more to share picking than simply buying them based on predicted dividends. Even if payout forecasts prove accurate, a stock could still deliver poor overall returns if its share price slumps.

This is my fear when it comes to buying Lloyds shares. The bank’s role as a major mortgage provider should set it up nicely as the homes market recovers. But, on balance, the outlook here is pretty bleak, in my opinion.

Rising competition, falling margins as interest rates drop, and weak economic conditions in the UK all mean its share price looks set to remain well below pre-2008 levels.

And not only is Lloyds more expensive than all of its rivals based on predicted earnings. It also lacks overseas exposure like most of those named competitors, thus the opportunity to grow profits even if the British economy struggles.

On balance, I’d rather look for other bargain stocks on the FTSE 100 today.

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. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered 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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