5 reasons to buy Lloyds shares while they’re cheap

After diving over 15% from their February high, Lloyds shares have since bounced back. But even at current price levels, I still see them as a bargain buy.

| 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.

Young female hand showing five fingers.

Image source: Getty Images

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.

Last year, my wife bought shares in Lloyds Banking Group (LSE: LLOY) at a price of 43.5p per share. As I write, the share price stands at 48.2p, up 10.8% on our buy price. But I’m keen to buy more Lloyds shares soon. Here’s why.

The shares look cheap to me

At its 52-week low on 13 October last year, the Lloyds share price bottomed out at an intra-day low of 38.5p. At this price, the Black Horse bank’s shares looked like a screaming bargain to me.

But even after leaping 25.2% since then, they still look undervalued to me. Here’s why I’d gladly buy more Lloyds stock today.

Should you invest £1,000 in Gamma Communications Plc 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 Gamma Communications Plc made the list?

See the 6 stocks

1. The stock is lowly rated

At the current price, the shares trade on a price-to-earnings ratio of 6.7. This translates into an earnings yield of 14.9%, versus around 8% for the wider FTSE 100 index.

In other words, buying Lloyds stock today would generate almost 1.9 times more earnings than buying the entire FTSE 100. To me, this suggests there may be value hiding in this bank stock.

2. The shares offer a 5% cash yield

Currently, the FTSE 100 stock offers a dividend yield of 5% a year. That’s around 1.35 times the FTSE 100’s cash yield of 3.7% a year. As a veteran value and income investor, this looks like a decent reward to me for holding Lloyds shares for the long term.

3. Dividends are covered three times by earnings

Of course, future dividends are never guaranteed, so they can be cut or cancelled at any time. Indeed, during 2020-21’s ‘pandemic panic’, Lloyds temporarily suspended its cash payout.

However, I’m optimistic that the bank’s directors might lift 2023’s dividend to exceed last year’s payout of 2.4p a share. That’s because this payout is covered almost three times by historic earnings.

Also, even if the bank has a tougher 2023 than 2022 — which I fully expect — I expect no cuts to the dividend.

4. Lloyds has a strong balance sheet

The Common Equity Tier 1 (CET1) ratio is one important measure of a bank’s financial strength. At the end of 2022, Lloyds’ CET1 ratio was 14.1%, comfortably above its target of 12.5%.

Retained earnings boost this ratio, while paying out dividends and other disbursements reduces it. I consider this level of high-quality regulatory capital to be perfectly adequate for the bank’s ongoing solvency.

5. Lloyds is buying back £2bn of its shares

Finally, the bank unveiled a new £2bn share-buyback programme with its 2022 full-year results. If fully implemented, this would reduce the size of the share base by around 6.3%.

Reducing the share base boosts future earnings per share, because these are spread across fewer shares. Over time, it should also lift dividends per share.

Finally, though I’m bullish — that is, positive — on Lloyds shares right now, I could be wrong. Slowing economic growth or a full-blown recession could hit bank earnings. Also, rising interest rates and falling disposable incomes could well lead to higher bad debts and loan losses.

Even so, I’d eagerly buy more Lloyds stock today — if I had enough spare cash, that is.

Should you invest £1,000 in Gamma Communications Plc 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 Gamma Communications Plc 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.

Cliff D’Arcy has an economic interest in Lloyds Banking Group shares. 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.

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

More on Investing Articles

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Down 65% from its highs, this FTSE 250 stock is one to consider buying low

Shares in a strong FTSE 250 company going through a cyclical downturn have caught Stephen Wright’s attention as a potential…

Read more »

Investing Articles

£20,000 invested in a Stocks and Shares ISA 5 years ago is now worth…

Stocks and Shares ISA investors have reaped enormous returns since the pandemic, but how much money have they actually made?…

Read more »