Billionaire investor Warren Buffett once said: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
Is he right? Take Lloyds Banking Group (LSE:LLOY) as an example.
With an estimated 2.3m shareholders – more than any other company — the bank could be described as the UK’s most popular share.
If Buffett’s to be taken literally, he’s suggesting that investors aren’t going to make much money out of the Black Horse bank. But he’s a ‘value investor’ and looks for stocks that are undervalued by the market.
And on this basis, the bank has lots going for it.
Crunching the numbers
Based on its balance sheet at 30 September 2024, Lloyds currently (10 February) has a price-to-book ratio of just 0.82.
This means if it ceased trading today, sold off all its assets and used the proceeds to settle its liabilities, there’d be 77p a share left over to return to shareholders. That’s a 22% premium to today’s share price.
And when it comes to dividends, I also think it offers good value. Analysts are expecting a total payout for 2024 of 3.09p. If correct, it means the stock’s presently yielding 4.9%, comfortably above the FTSE 100 average.
Looking ahead to FY27, the average of the 18 analysts’ forecasts is for a dividend of 4.26p. This implies a very healthy forward yield of 6.8%.
It’s a similar story when it comes to earnings. Based on expected earnings per share for 2024 (6.6p), the bank trades on a price-to-earnings ratio of 9.5. This is comfortably below, for example, Bank of America (14.5), which is a stock Berkshire Hathaway, the investment vehicle of which Buffett is chairman and chief executive, has a $31.7bn stake (at 30 September 2024).
Another interpretation
But returning to Buffett’s quote, I think what he’s really trying to convey is that it’s best to ‘get in early’ and buy a stock before others notice it’s undervalued. Given that Lloyds was founded in 1765, anyone taking a position now for the first time cannot be accused of being an early-stage investor!
However, I suspect Buffett’s warning is about investing in shares that have already performed strongly. Although he came up with his quote long before the concept of the Magnificent 7 (Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla) was invented, Berkshire Hathaway’s only invested in one of these, Apple.
But as much as Lloyds appears to be attractively valued, there are two reasons why I’m not going to buy any of its shares. Firstly, there’s a dark cloud that hangs over the bank.
The Financial Conduct Authority is currently investigating the possible mis-selling of motor finance. In addition, there have been a number of related (but separate) court cases. Keefe, Bruyette & Woods estimates that Lloyds could face fines and compensation of £4.2bn.
Secondly, it’s heavily exposed to the UK economy, which appears to be struggling at the moment. As recently as October, its own ‘base case’ estimate of 2025 economic growth was 1.3%. On 6 February, the Bank of England downgraded its forecast from 1.5%, to 0.75%. I fear a domestic economic downturn will impact Lloyds’ bottom line.
