Is Lloyds Banking Group PLC The Best Bargain In The FTSE 100?

Why are Lloyds Banking Group PLC (LON: LLOY) shares so cheap?

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Despite a rally from mid-February, Lloyds Banking Group (LSE: LLOY) shares are down 25% from their 52-week peak (in May 2015) to 69p, so are we looking at a dog or a seriously overlooked bargain?

As the biggest traded share on the FTSE 100, it seems hard to believe that it could be the latter… but I really think it is. Now, I have to come clean and tell you I thought the same when I bought some last September at 76p and then sat and watched them slide all the way to February’s depths of 56p, so it’s possible I might be wrong. But I just can’t see any faults in Lloyds’ fundamentals.

Lloyds comfortably exceeded the PRA’s stress test thresholds last year, with a reported CET1 ratio of 12.8% and leverage ratio of 4.9%, dropping only to an estimated 9.5% and 3.9%, respectively, under the worst of the stress simulation. No liquidity problems then.

Should you invest £1,000 in Legal & General right now?

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Stronger recovery

Lloyds came back from its bad old bailed-out days well ahead of fellow struggler Royal Bank of Scotland, and was able to convince the PRA to let it start paying dividends again in 2014. The yield that year was only 1%, but 2015’s rose to 3.8% (including a special payment of 0.5p on top of the ordinary 2.25p per share). And based on the bank’s progressive dividend policy, analysts are forecasting a yield of 6.3% for this year, followed by 7.4p in 2017 (covered 1.5 times by earnings).

On the P/E front, even the 10% fall in EPS fall predicted for this year would give a multiple of just nine, dropping slightly with a very small EPS rise on the cards for 2017. That’s way below the FTSE’s long-term average of around 14, so why the undervaluation?

Lloyds’ flat earnings forecasts don’t help, and only add to the uncertainty facing the banking sector as a whole. I don’t think it’s a great problem, and I see the P/E undervaluing the shares even in the case of a few years of earnings going nowhere. But to institutions that hate uncertainty, it makes earnings visibility a bit cloudier — and bank earnings are hard to understand at the best of times.

Misbehaviour!

Then there’s that horrendous track record of banking sector naughtiness, with Lloyds’ part in the PPI mis-selling scandal especially egregious. But we really do seem to be getting past that, and at least the PPI business should hopefully be done and dusted by 2018. Again, it’s uncertainty, and once that goes, who knows?

The government’s stake in the bank must be holding the share price back too, with some investors reluctant to buy at today’s market price in the face of that big overhang when the final taxpayers’ stake is sold off. Add the general malaise affecting the whole financial sector and I see Lloyds’ low valuation as largely a sector characteristic rather than an accurate reflection of the bank itself. After all, Lloyds is on a lower P/E valuation than RBS, and a similar rating to HSBC — and those two look far less attractive right now.

Best in class?

So I see Lloyds as the best bank in a sector that’s suffering from very weak sentiment, but what might be the “outer” of value? Get that government stake sold off, and once we see healthier earnings forecasts I can see an upward rerating for Lloyds.

Should you invest £1,000 in Legal & General 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 Legal & General made the list?

See the 6 stocks

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.

Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Pound coins for sale — 51 pence?

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

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