Over the past 12 months, I have recommended the Lloyds (LSE: LLOY) share price to investors several times. The company’s market-beating dividend yield, position in the UK banking market, and large profit margins lead me to conclude that the business could have been an attractive addition to any portfolio.
Unfortunately, the coronavirus pandemic blew my investment case for the bank out of the water. Investor sentiment towards the lender plunged in March, and it has struggled to recover.
However, I think this could be a good opportunity for long-term investors like me. Today I’m going to explain why.
Lloyds share price outlook
Lloyds is facing a hostile environment. The coronavirus crisis is a significant headwind for the group.
Further economic turbulence and the prospect of a messy divorce from the European Union could continue to depress the group’s bottom line for the next 24 months.
But I think I should look past these short-term headwinds. Lloyds is one of the most profitable and well-capitalised banks in Europe, and it has a come along way since the financial crisis. In 2018, the bank passed its pre-crisis level of profitability, reporting a net profit of £4.4bn.
Nevertheless, the Lloyds share price is currently trading only a fraction higher than it was at the height of the financial crisis. This does not make much sense to me. The business is certainly worth more than was in March 2009, and its outlook is far more attractive today than it was 11 years ago, despite the twin headwinds of coronavirus and Brexit.
As such, I believe that now could be an excellent time to buy the shares. What’s more, I think there’s a high probability the stock could return to 50p in the medium term. Indeed, the stock is currently selling at a price-to-book (P/B) ratio of just 0.4. That’s nearly half the UK banking sector average. To put it another way, it looks as if the Lloyds share price offers a wide margin of safety at current levels.
Income champion
The business does not only look cheap on a P/B basis, but I reckon it also has excellent income potential. Before the lender was forced to postpone dividend distributions by regulators, it was on track to pay out a total of 2.6p per share to investors this year. That would give a dividend yield of nearly 10% on the current stock price.
Analysts are expecting it to reintroduce dividends next year. They’ve pencilled in a payout of 1.5p for 2021. If achieved, this will give the stock a dividend yield of 5.7%.
These figures suggest that the stock has the potential to produce large total returns for investors like me in the medium term. That’s why I reckon the Lloyds share price looks undervalued right now and could make a great addition to any diversified portfolio of UK shares.
