Rummaging around in the FTSE 100 index earlier today, I spotted something that surprised me. So far this calendar year, Lloyds Banking Group (LSE: LLOY) shares have barely budged.
What’s more, they have lost considerable value since mid-2018. So why do I hold such high hopes for this widely held and heavily traded stock?
A tough four months
Go back to early February and Lloyds stock was riding high. Indeed, on 9 February, the Black Horse bank’s share price hit a 52-week high of 54.33p.
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Within a month, a US banking crisis sent financial stocks plunging across the globe, including Lloyds shares. Here’s how they have performed over seven different periods, based on the current share price of 45.38p:
| One day | +0.2% |
| Five days | +1.7% |
| One month | -0.5% |
| Year to date | +0.1% |
| Six months | -0.9% |
| One year | +5.9% |
| Five years | -26.9% |
Although it has been weak in 2023, this stock is up almost 6% over the past 12 months. Adding in cash dividends would push this return into double digits. Slightly better than the wider FTSE 100, but not exactly an exceptional performance.
At the current share price, Lloyds is valued at almost £29.7bn. That’s hardly a hefty price tag for the UK’s largest mortgage lender and a leading provider of credit to individuals and businesses.
Then again, Lloyds stock has underperformed the wider market since the global financial crisis of 2007/09, so perhaps its market discount is well-deserved?
We own Lloyds
For the record, my wife and I bought this stock for our family portfolio at 43.5p a share in late-June of last year. To date, we’ve made a modest return of 4.4% from this buy (excluding dividends), but are hoping for far higher returns to come.
Currently, this popular stock looks undervalued to me. It trades on a price-to-earnings ratio of 6.3,
for an earnings yield of 15.9%. That’s about twice the FTSE 100’s yield.
Also, the dividend yield of 5.3% a year looks attractive to me. Even better, it is covered three times by historic earnings. That’s a hefty margin of safety.
What might lift Lloyds shares?
One big worry at the moment is rising bad debts and loan losses at British banks, driven by rising interest rates, falling disposable incomes and sky-high energy bills.
However, if the group doesn’t report a hefty increase in write-downs in its half-year results on 26 July, then this would be good news for shareholders.
Second, if write-downs aren’t as bad as feared, then the bank might deliver earnings growth with its latest set of results. As a Lloyds shareholder, I’d see this as a positive development.
Third, with plenty of room for dividend increases, I’d hope to see the bank lift its cash payout, given the previous full-year payout rose by a fifth. Analysts expect this year’s payout to be lifted by a sixth (16.7%) to 2.8p from 2.4p a share.
Finally, my wife and I have no plans to buy Lloyds shares right now, largely due of lack of funds. But we fully intend to keep our existing holding for long-term dividend income and capital gains!
