Lloyds Bank (LSE: LLOY) is a FTSE 100 stock that tends to divide opinion. On one hand, there are thousands of investors across the UK who believe Lloyds shares are significantly undervalued. On the other, there are those who see LLOY as a high-risk share.
Wondering whether Lloyds is a ‘buy’ or a ‘sell’ right now? Let’s take a look at the bull case and the bear case.
At the core of the investment case for Lloyds is the argument that the bank has turned itself around since the Global Financial Crisis. This is certainly a valid viewpoint, in my opinion.
Just look at the bank’s profits – between FY2014 and FY2018, Lloyds’ operating profit climbed from £1,762m to £5,960m. Moreover, the FTSE 100 bank recently passed a stress test by the Bank of England (to determine if it could withstand a 33% decline in home prices over three years) with flying colours.
This suggests it’s far more robust today than it was in the past. Additionally, the PPI claims debacle is now finally over.
It’s also argued Lloyds has a sound strategy in its goal is to become significantly more digital. I think this point has merit too, as Lloyds is investing a considerable sum of money to deploy innovative new technologies, such as robotics and machine learning in an effort to make banking simpler and easier for customers. I believe it’s on the right track in this regard.
Meanwhile, Lloyds bulls argue the stock is cheap and that the dividend yield is attractive. It’s hard to disagree here. Currently, Lloyds trades on an estimated P/E ratio of 7.7 (versus the FTSE 100 median of 16.7) and sports a trailing dividend yield of 5.6%. Looking at those metrics, the stock appears to offer a lot of value right now.
Turning to the sell case, one of the main arguments of the bears is that Lloyds is highly exposed to the UK economy, which adds uncertainty. This is a fair point. As the UK’s largest mortgage lender, the bank is definitely exposed to economic conditions in the UK. If Brexit was to result in a severe economic contraction, Lloyds’ profitability would almost certainly take a hit.
Another issue to consider is the threat of new entrants into the banking space. Right now, digital banks such as Revolut and Monzo are enjoying tremendous growth. According to research from Accenture, UK digital banks will see their combined customer base rise from around 13bn people to 35bn people over the next year.
Meanwhile, the world’s largest tech companies are also moving into banking. For example, Apple has Apple Pay, and there are rumours Amazon is shortly to launch a lending service. This threat shouldn’t be ignored. Lloyds can’t afford to be complacent.
Buy or sell?
Weighing everything up, I personally see Lloyds as a ‘buy.’ Yes, there are risks to the investment case, however, at the current valuation, I’d argue the risks are priced in. Add in the big dividend yield, and you have an attractive risk/reward proposition, in my view.
That said, if you buy Lloyds shares, diversification is crucial. You don’t want to be putting all your eggs in one basket.
Edward Sheldon owns shares in Lloyds Banking Group and Apple. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Apple. 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.