The Lloyds Banking Group share price is down 9% since the start of the year. As a result, the stock trades at a price-to-earnings (P/E) ratio of around six.
That’s a significant discount to the FTSE 100 average. And while it’s hard to argue that the company has incredible margins or growth prospects, I think investors should consider buying some shares at these levels.
Earnings
Over the last few years, Lloyds has been growing its profts at an impressive rate. From 1p in 2020, the company brought in earnings per share of 8p in 2021 and 7p in 2022.
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That has largely been the product of improving margins. As interest rates have increased from 0.1% to 5.25%, the gap between the amount the company makes on its loans and the amount it pays out on deposits has widened.
Lloyds consistently maintains some of the best net interest margins across the sector. As a result, I think it stands to benefit more than other banks from interest rates remaining higher for the foreseeable future.
Moreover, the company has the largest share of UK retail deposits. This gives it an advantage over its competitors when it comes to financing loans.
Risks
Higher interest rates also bring risk though. If higher rates lead to loans becoming unaffordable for borrowers, then Lloyds could face some losses across its portfolio.
This is something that investors should take seriously, but a couple of things are worth noting here. The first is that a P/E ratio of six means the company’s earnings have some way to fall before the stock starts to look overpriced.
It’s also significant that interest rates have stabilised recently, with no increases since August. And with inflation in the UK falling, there’s reason to think the pressure on borrowers might ease soon.
If interest rates get too high, then there’s a significant chance of loan losses. But I think the current share price more than accounts for this risk, I feel.
Returns
A low share price makes it easier for Lloyds shareholders to grow their stake in the business at a significant rate. This can happen through a combination of dividends and share buybacks.
Right now, the stock comes with a dividend yield of around 6%. This means investors get a decent chance to buy more shares with the cash the company distributes.
On top of that, the company is buying back its stock to bring down the outstanding share count. And this is much more effective when the shares trade at a lower price.
The Lloyds share price thus gives investors a dual boost for growing their stake in the business. Reinvesting dividends at low prices alongside the company’s buybacks forms a powerful combination at today’s prices.
A stock to consider?
I think Lloyds is a stock for investors should consider buying. The interest rate environment presents a risk, but I think the current share price means the potential rewards are worth it.
As I see it, investor pessimism is causing bank shares to trade at low prices. That’s why I’m looking to add Lloyds – which I see as the best of them – to my portfolio in the near future.
