Lloyds (LSE: LLOY) shares have dropped 16% from their 23 October one-year traded high of 63p.
Such a fall in any stock raises the possibility to me of a bargain to be had. Or it could be that the business is fundamentally worth less than it was before.
So, which is it?
The stock valuation
When trying to determine what any share is worth I begin by looking at some key valuation measures I trust.
Starting with the price-to-earnings (P/E) ratio, I see Lloyds is currently trading at 7.2. This is at the bottom of its competitor group, which averages 7.8. So, it looks a bargain on this measure.
The same is true on the price-to-sales (P/S) ratio, with the bank trading at 1.7 against a 2.1 competitor group average.
To pin down what this means in share price terms, I ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows Lloyds shares are 60% ‘undervalued’ at their current 53p price.
So, a fair value for the stock would be £1.33. This figure may surprise those who see that Lloyds has not traded at this level since October 2008. And there is no guarantee it will ever reach that price again.
However, DCF valuations are based on future cash flow forecasts and are not related to past share price performance.
In sum, the DCF figure reinforces to me the possible bargain nature of Lloyds suggested in the relative P/E and P/S measurements.
How does the business look now?
The first nine months of 2024 were tougher for the bank than the same period of 2023.
This was caused by a reduction in the bank’s net interest income (NII) as UK interest rates stalled and then fell. NII is the difference in the money it pays out on deposits and takes in on loans.
In Lloyds’ case, underlying net interest income fell 8% to £9.6bn. Underlying profit dropped 12% to £5.4bn.
Q3 2024 was slightly better, with a 6% year-on-year drop in underlying net interest income and an 8% decline in underlying profit.
Nonetheless, the bank showed a statutory profit before tax of £1.823bn. This was ahead of market expectations of £1.6bn, albeit 2% lower than Q3 2023.
The main risk to Lloyds, in my view, is any significant narrowing of its NII from here.
That said, consensus analysts’ estimates are that its earnings will grow by 4.2% a year to the end of 2026.
An attractive passive income stock
Passive income is money generated from minimal effort, such as from dividends paid by shares.
This is the focus of my portfolio now, having turned 50 a while ago. I intend to maximise this income stream to minimise my weekly working schedule.
Currently, Lloyds shares yield 5.2% (based on 2023’s 2.76p dividend and its 53p share price). Analysts forecast this will rise to 6.2% in 2025 and 7.2% in 2026.
Now, 7%+ is what I look for in my passive income stocks, yet Lloyds shares do not look an unmissable bargain for me.
This is simply on the basis that I never buy stocks priced at under £1, as the price volatility is too great for my liking.
At just 53p right now, each penny represents nearly 2% of the entire value of the stock!
