At a P/E ratio of 6, is the Lloyds share price too cheap to ignore?

Stephen Wright thinks dividends and share buybacks make the Lloyds share price something investors should look at right now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

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.

Created with Highcharts 11.4.3Lloyds Banking Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL17 Nov 201817 Nov 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

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.

Should you invest £1,000 in Lloyds Banking Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?

See the 6 stocks

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.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Up another 6% in the last week! Is the BP share price ready to go gangbusters?

The BP share price has been on fire lately. Harvey Jones looks at what's driving the FTSE 100 stock's recovery,…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

High-flying IAG shares are up 50% in 3 months but I still think they’re too cheap to ignore!

Timing the market is almost impossible but Harvey Jones managed it when buying IAG shares in April. Can the FTSE…

Read more »

ISA coins
Investing Articles

Want to earn £1k+ in annual passive income from a £20k Stocks and Shares ISA? Consider this!

Our writer sets out some points to consider when trying to target a four-figure income from one year's Stocks and…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

3 risks to the Rolls-Royce share price, after its 979% climb

After a 979% growth in the Rolls-Royce share price, our writer still sees things to like in the business. But…

Read more »

Buffett at the BRK AGM
Investing Articles

Can Warren Buffett principles help when looking for AI stocks to buy?

Billionaire Warren Buffett has made a fortune by applying old investing principles to new industries. Can our writer learn some…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

Up 36% in 3 months! Is my nightmare purchase of Glencore shares about to come good with a vengeance?

When Harvey Jones bought Glencore shares two years ago, he didn't expect to find himself sitting on a 45% loss.…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

£1,000 invested in Lloyds shares 5 years ago is now worth…

Anyone who’s owned Lloyds shares over the last five years is probably laughing right now with impressive returns that crushed…

Read more »

A mature woman help a senior woman out of a car as she takes her to the shops.
Investing Articles

If a 50-year-old puts £500 a month into a SIPP, here’s what they could have by retirement

Investing £500 a month with a SIPP could build a pension pot worth £269,900 or quite a bit more over…

Read more »