Over the past couple of years, Lloyds (LSE:LLOY) shares have been volatile. In the past three months, they’ve been relatively flat under 50p. In a climate of rising interest rates, though, could the stock be a bargain? Let’s take a closer look.
High earnings growth and a low P/E ratio
The FTSE 100 business exhibits strong long-term growth. Between 2017 and 2021, for instance, earnings per share (EPS) rose from 4.4p to 7.5p.
By my calculation, this results in a compound annual EPS growth rate of 11.25%. This is something I find very attractive indeed.
As appealing as this growth is, the company also paid a dividend of 2p per share in 2021. At current levels, this equates to around 4.3%. It’s good to know I could derive an income stream as well as potentially enjoying growth.
I’m also of the opinion that Lloyds shares may be cheap, regardless of whether they are low or not.
With reference to price-to-earnings (P/E) ratios, I can gain an insight into the proportion of earnings to the current share price. Lloyds has a forward P/E ratio of 6.61, lower than competitors HSBC and Citi. It’s also below the UK banking sector average, which is between 13 and 15.
To that end, I’m satisfied that buying at the current share price could provide value for money.
Rising interest rates, rising share price?
The share price has struggled to break above 50p, and I’ve long thought that this presents good value. In recent months, the banking giant has been benefiting from a climate of rising interest rates.
In the UK, rates have climbed to 1.75%. While this is still historically low, they’re increasing. In fact, Citi recently released research stating that it expects UK inflation to hit 18% next January. As such, it’s quite conceivable that interest rates will continue to rise.
In the US, the Chairman of the Federal Reserve, Jerome Powell, has dropped strong hints that they will climb again before the end of the year.
This is generally good news for Lloyds, because it makes it possible to charge more for borrowing facilities.
However, it can also act as a deterrent for potential customers who may find loans too expensive to justify.
The firm has already posted improved results on account of this wider economic trend. For the six months to 30 June, the company reported a 13% rise in net interest income. This is the difference between the amount paid for customer deposits against the amount charged for loans.
This is a strong suggestion that rising rates are of financial benefit to Lloyds. I therefore find it puzzling why the share price hasn’t flown above 50p. It may begin to climb soon.
Overall, I think Lloyds shares may provide value at 46p, based on the forward P/E ratio. Add to this historical earnings growth, the potential for income, and rising rates, I think that this could be a good investment for my portfolio. I’ll be adding the shares soon.
