Sometimes I feel like I have been shouting it from the rooftops for months. Lloyds Banking Group (LSE: LLOY) is a great screaming buy!
That’s how it looks to me anyway, trading at a dirt-cheap valuation of just 7.7 times forward earnings and with a forecast yield of a mighty 6.1%. Those look like fire-sale numbers to me, yet Lloyds is far from a burnt-out case.
Maybe I’ve been a bit premature, though. I was bigging up the stock a year or so ago, and its share price has fallen 20% since then. It trades 30% lower than it did five years ago. I can scream about this amazing buying opportunity all I like, but actual performance has been nothing to shout about. Can that change?
Not Brexit again
The big concern is that Lloyds has greater domestic UK exposure than any of the big banking names, earning the majority of its revenues by taking deposits and lending money to personal and small business customers. This puts it in the front line of the slowing UK economy and all the uncertainty that Brexit brings.
Slowing economic growth, stagnating wages, and rising indebtedness all threaten Lloyds, with no respite from overseas.
There are other worries too, as Edward Sheldon points out here. Lloyds has so far set aside a flabbergasting £19.2bn to cover PPI mis-selling claims and could take a further hit if there is a last-minute rush before the final claims deadline on 29 August. Lean and hungry Fintech (financial technology) upstarts and a rash of new challenger banks also pose a growing threat.
British could be best
Naturally, volatility in October and December wreaked havoc on the share price. But Lloyds has fought back, its stock up 11% in the last month. The buying opportunity may be closing, although for a complete re-rating, we need more Brexit clarity.
A growing army of advisers and analysts reckon that UK equities look a real bargain right now, as the B-word destroys investor sentiment. I would put Lloyds high on that list and it could recover rapidly if a no-deal, cliff-edge departure is averted.
That forecast yield of 6.1% has generous cover of 1.9, and is forecast to hit 6.4% next year. Operating margins are a healthy 43.5%, so it shouldn’t be short of cash. Its P/E of 7.7 is half the FTSE 100 average of 15.72. The latest price-to-book value is just 0.8, a further sign that Lloyds may be trading at discounted levels.
It won’t be plain sailing, though. Forecast revenue figures suggest stagnation for the next two or three years, while profits could even slip slightly.
Trap or treat?
Perhaps I was wrong to shout myself hoarse about Lloyds. My Foolish colleague Royston Wild reckons it’s a classic value trap.
Yet I continue to believe that today’s entry price offers long-term investors the opportunity to buy into a hugely generous long-term dividend income stream. I’ll stop shouting now. Anybody seen my throat sweets?
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harveyj has no position in any of the shares mentioned. 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.