MENU

Is Lloyds Banking Group PLC A Bona-Fide Bargain Or Classic Value Trap?

Shares in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) have continued to flail during the past year, despite the fruits of significant restructuring vastly improving the bailed-out bank’s earnings outlook. The company shed 3.3% during the course of 2014 and is flat in the year to date, leading many to question whether the market has missed a trick.

The City’s army of analysts expect Lloyds to swing from losses of 1.2p per share in 2013 to earnings of 7.8p in 2014, results for which are due on Friday, February 27. And growth is anticipated to roll on thereafter, albeit at a much steadier pace — rises of 4% and 5% are pencilled in for 2015 and 2016 correspondingly.

As a result Lloyds is, on paper at least, one of the most appetising stocks on the FTSE 100, the business carrying a P/E multiple of 9.1 times prospective earnings for this year and 8.7 times for 2016 — any reading below 10 times is widely considered too good to pass up.

A darling deal or merely risk reflection?

However, it could be argued that the bank’s price merely reflect the vast levels of risk investors has factored in, rather than presenting an opportunity to snap up an overlooked bargain.

Like most of the banking sector, Lloyds changes hands around or below the ‘bargain’ threshold of 10 times or below — Barclays shares a forward earnings multiple of 9.1 times for 2015 while Standard Chartered sports a reading of just 7.9 times — as fears circulate that a faltering eurozone could infect the British economic recovery.

On top of this, Britain’s financial giants also face colossal financial penalties owing to previous misconduct, and Lloyds is one of the worst offenders. The company has had to stash away another £900m during July-September to cover claims relating to the mis-selling of PPI and interest rate swaps, taking total provisions to a colossal £11.3bn.

On top of this, Lloyds also faces pressure on the bottom line in key markets as its competitors step up their attack in key markets, particularly in the critical mortgage sector where Lloyds holds the crown. HSBC rolled out the cheapest fixed-rate product on the market just last week at 1.19%, and Barclays, Santander and Royal Bank of Scotland have also been busy rolling out their latest lip-smacking deals in recent weeks.

Dividend resumption may come under pressure

As analysts expecting earnings to continue trekking higher for some time to come, Lloyd is predicted to get its dividend policy surging again from this year onwards. For 2014 the bank is anticipated to fork out a final dividend of 1.2p per share, with the City convinced that it will receive the green light in the next few weeks from the Prudential Regulatory Authority (PRA) to restart payments.

And with the dividend printers firmly switched back on, analysts anticipate that Lloyds will provide a total payout of 2.7p in 2015, creating a handsome yield of 3.7%. Another hefty lift is predicted for 2016, to 4.3p, driving the yield to an eye-watering 5.7%.

However, I believe that Lloyds’ fragile cash position could put paid to these heady projections. The business crept through the European Banking Authority and Bank of England’s capital stress tests at the back end of last year, and could be forced to stash away extra funds in expectation of tougher tests from Threadneedle Street this December.

And should earnings forecasts begin to come under pressure, and the bank’s legal bill continue to creep higher, the dividend outlook at Lloyds could become significantly murkier for the coming years.

But regardless of whether you fancy stashing your cash in Lloyds, I strongly recommend you check out this brand new and exclusive report that highlights a hatful of blue-chip wonders primed to kick-start your dividend flows.

Our "5 Dividend Winners To Retire On" wealth report highlights a selection of incredible stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays that we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no further obligation.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.