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Lloyds share price: why is it underperforming the FTSE 100?

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Over the last month, Lloyds (LSE: LLOY) shares have underperformed the FTSE 100 index. A month ago, the FTSE 100 was hovering just above 7,000 points, after falling in February and March. However, since then, it has rebounded strongly and moved back above 7,500 points. That’s a one-month gain of around 7%. By contrast, Lloyds’ share price was 65p a month ago, and today, the shares are still at 65p. That’s a significant underperformance.

Today I’m analysing why Lloyds shares have lagged their index recently and looking at whether the stock is worth buying right now.

Ex-dividend

The first thing to note about Lloyds is that the stock went ‘ex-dividend’ just a few weeks ago on April 19. When a stock goes ex-dividend, it means that the shares no longer come attached with the right to be paid the most recently declared dividend. And what often happens on the ex-dividend date is that the stock falls by approximately the amount of the dividend that is set to be paid out.

In Lloyds’ case, it declared a final dividend for FY2017 of 2.05p per share back in February. So when the stock went ex-dividend a few weeks ago, the shares dropped by approximately this amount, from around 68p to 66p. In reality, investors are no worse off, despite the share price fall, because they’ll receive a cash payout of 2.05p per share into their bank accounts.

UK interest rates

Another reason that Lloyds shares have underperformed recently might be to do with economic data and interest rates. In the last week, economic data has been weaker than expected. This makes it more unlikely that interest rates will be increased in May, and that has implications for Lloyds and other UK banking stocks.

Higher interest rates are generally good for banks as they enable them to earn a higher spread on the money they borrow and the money they lend out. With interest rates set to potentially stay low for longer, it may be impacting sentiment towards Lloyds.

Should you buy Lloyds shares today?

Now I’ve looked at why Lloyds shares have underperformed the FTSE 100, let’s look at the investment case for the bank. At 65p, are Lloyds shares worth buying?

Personally, I believe that Lloyds shares offer strong value right now, for several reasons.

For starters, the bank appears to have positive momentum. Recent first-quarter results were solid, with underlying profit and earnings per share increasing 6% and 36% respectively on the same period last year. Lloyds stated that asset quality remains strong with no signs of deterioration across the portfolio. Furthermore, in February, the bank hiked its dividend by an impressive 20%, which signals that management is confident about the future.

Yet, Lloyds’ valuation doesn’t reflect this positive momentum at all. With City analysts expecting earnings of 7.7p per share this year, Lloyds’ forward P/E ratio is just 8.4. That’s way below the average FTSE 100 forward P/E of 14.6.

Another attraction of Lloyds shares is the huge dividend yield on offer at present. Investors buying now can pick up a trailing yield of 4.7% on their investment—a much better return than you can get from a savings account.

Given the low valuation and high yield, I rate Lloyds as a ‘buy’ right now. The share price looks undervalued, in my opinion.

Buy-And-Hold Investing

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Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.