The Motley Fool

Lloyds shares have fallen 25% in a month. Is this a buying opportunity?

Image source: Getty Images.

In recent weeks, Lloyds Bank (LSE: LLOY) shares have plummeted due to the economic uncertainty associated with the coronavirus outbreak. In the space of just a month, Lloyds’ share price has fallen from around 57p to 43p, a decline of about 25%.

After such a significant share price fall, many investors are likely to be wondering whether Lloyds shares are now a bargain. With that in mind, here’s my take on the investment case for Lloyds.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Rising dividends

Let me start by saying that Lloyds is a stock I’ve been relatively bullish on over the last few years. The bank has come a long way since the dark days of the Global Financial Crisis and profits have been on the rise. Dividends have also been on the up, and the yield on offer from the FTSE stock has often been very attractive. 

While recent full-year results for FY2019 were a little disappointing (mainly due to the significant cost of PPI charges), with earnings per share dropping from 5.5p to 3.5p, the bank still raised its dividend by 5% to 3.37p per share. That marked five consecutive dividend increases since the bank reinstated its dividend in FY2014 – a decent achievement. The group said that it “faces the future with confidence”, and that it remains well placed to “deliver strong and sustainable returns for shareholders” going forward.

It’s worth noting that City analysts currently expect earnings per share of 6.82p this year, along with a dividend payout of 3.5p per share (a yield of around 8% at the current share price), which would represent a 4% increase in the dividend.

Coronavirus impact

The problem now, however, is that the implications of the coronavirus outbreak add a high level of uncertainty to the investment case.

As a UK-focused bank, Lloyds is highly exposed to the fortunes of the UK economy, which in turn, is exposed to global activity. If the coronavirus results in a severe economic contraction, which it may well do, Lloyds profits are likely to take a further hit. This could impact the bank’s ability to grow its dividend and result in a further share price fall. 

This is a risk that shouldn’t be ignored. Many experts now believe that UK economic growth is likely to stall in the near term. For example, last week, analysts at Deutsche Bank halved their UK growth forecast for this year to just 0.5%, a post-Global Financial Crisis low, because of the outbreak.

Lower interest rates (the Bank of England has today slashed its base rate from 0.75% to 0.25%) are another problem for Lloyds. This is due to the fact that rate cuts reduce banks’ net interest spread – the difference between borrowing and lending rates. Again, this is likely to impact Lloyds’ profits and potentially its dividends.

Overall, the investment case for Lloyds now looks far riskier.

Speculative buy

That said, the stock does now look cheap. Assuming zero earnings growth this year, the P/E ratio is 12.4. And if we plug in the consensus earnings forecast of 6.8p, the P/E ratio is just 6.4.

All things considered, I see Lloyds as a more speculative buy right now. There are risks to the investment case, however, if you’re willing to hold the stock for a few years, I think there’s a chance you could be rewarded, given the stock’s low valuation.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Edward Sheldon owns shares in Lloyds Bank. 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.