The Lloyds share price looks like a bargain buy today at less than 30p. Should you grab this chance to buy its stock at a dirt cheap price?
Shares in Lloyds Banking Group (LSE: LLOY) have dropped by half during the Covid-19 crisis. But this is not just a one-off fall. The Lloyds share price is down more than 95% since topping 680p just before the 2008 financial crisis.
Despite this, it remains one of the most traded names on the FTSE 100, and I personally tipped it before coronavirus struck, at around 57p.
Long-term bargain buy?
At the time, it traded at around eight times earnings, with a price-to-book value of just 0.5 and a juicy prospective yield of 5% or 6% a year. The Lloyds share price looked like a bargain buy to me then. But it is harder to judge today, as the pandemic destroys traditional valuation methods.
Investors in Lloyds had grown used to its disappointing share price performance, their consolation was the promise of dividends galore as it steadily restored payouts. That dream has gone for now, after the Prudential Regulation Authority (PRA) instructed banks to halt dividends and share buybacks, to increase lending capacity to help businesses and individuals survive the crisis.
This was a particular blow to Lloyds customers, as the bank had pledged to increase the frequency of its dividends to once a quarter from June.
The Lloyds share price is under siege
We should be grateful for the 2008 financial crisis in one respect. The regulators forced stricken banks to create substantial capital and liquidity buffers, and the PRA has urged them to dig into these, to support the economy while maintaining their own safety.
Banks have come in for criticism for playing it too safe, and failing to channel desperately needed funds via the coronavirus business interruption loan scheme. While in many countries, the government 100% backs emergency loans, in the UK, banks must cover 20%, which is understandably making them wary.
Despite all the uncertainty, the opportunity to buy Lloyds below 30p looks difficult to resist. Aren’t we always saying that investors should seize moments like these?
You will need nerves of steel, though. The longer the lockdown lasts, the harder the recovery will be, as more businesses fold and millions lose their jobs. Debt impairments will surely rise, while near-zero interest rates will squeeze net lending margins. The UK housing market is in lockdown, and Lloyds is exposed, as the group has 20% of the mortgage market.
Investors are wary. While the FTSE 100 has rebounded by 25% in the last fortnight, Lloyds stock has hardly budged. You would have to be a particularly brave, contrarian investor to buy its stock today.
On the other hand, 30p is undeniably cheap. If you plan to hold for at least 10 years, the Lloyds share price could one day prove a bargain buy. I’m sorely tempted.
Harvey Jones 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.