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Why I’m backing the Lloyds share price for 2021

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I’m backing the Lloyds (LSE: LLOY) share price for 2021. After a rough 12 months in 2020, the stock is cheap, in my opinion. With the UK economy’s outlook improving, I reckon shares in the lender could see a rapid recovery in the year ahead.

Lloyds share price performance

I like to buy stocks when they’re trading at depressed levels. Research shows this can be the most profitable strategy in the long run. That’s why I try to follow this tried-and-tested method of investing.

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Before I buy a stock, I like to understand why it’s trading at a depressed level. And the Lloyds share price has been trading at a depressed level for much of the past 12 months. I think it’s easy to understand why investor sentiment towards this business is so depressed.

As one of the largest lenders in the UK, its success is tied to that of the economy. Over the past year, the country’s economy has faced many threats, including the coronavirus pandemic and Brexit.

Lloyds has suffered as a result. The lender has written off billions of pounds in loans. What’s more, ultra-low interest rates have weighed on the firm’s bottom line. They’ll continue to do so until the Bank of England decides it’s time to change course. That could take many years.

As such, it seems to me as if the bank will struggle to return to 2019 levels of profitability in the near term.

However, I think the Lloyds share price is now so cheap that only a slight improvement in the lender’s fortunes could lead to a substantial re-rating of the stock.

Re-rating

At the time of writing, shares in this UK banking giant are trading below book value. To me, that doesn’t make much sense. Technically, a company deserves to trade below its book value figure if it’s losing money, as this implies the business is shrinking.

That’s not the case with Lloyds. City analysts expect the group to report a net profit of over £1bn in 2021. On that basis, I reckon the stock is worth more than book value, which suggests the Lloyds share price could rise substantially from current levels.

At the same time, the lender is awash with capital. This suggests management will return capital to investors with a dividend when the group is allowed to.

Projections hint the stock could support a dividend yield of around 3-5% in the new year. This level of income looks highly attractive in the current interest rate environment.

The bottom line

All in all, I think the Lloyds share price looks too cheap at current levels, considering its growth potential. The stock also has tremendous income potential, which implies I’ll be paid to wait for investor sentiment to improve and the stock’s valuation to recover.

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Rupert Hargreaves owns no share 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.

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