The Lloyds (LSE: LLOY) share price has now recovered to above its long-term ‘support level’ of 42p. This is a price that historically has seen buying heavily outweigh selling.
This said, it is still trading 20% lower than its 9 February high this year of 54p.
Are the valuations compelling?
Currently, the ‘Big Four’ UK bank trades at a price-to-earnings (P/E) ratio of five. This is higher than FTSE 100 peers Barclays (4.4), and NatWest (4.9). But it is lower than HSBC Holdings (6.3), and Standard Chartered (8.9).
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Based on the peer average of 6.1, Lloyds looks notably undervalued to me.
It looks even more so compared to the current European banks’ P/E average of 7.8.
Core business looks strong
Lloyds’ H1 results support this view, I feel. Pre-tax profit increased nearly 25%, to £3.9bn compared to £3.1bn the same time last year. Net income also rose, by 11%, to £9.2bn.
H1’s return on tangible equity (ROTE) was 16.6% against 11.8% in the same period in 2022.
Additionally positive is that the bank now expects its net interest margin to be over 310 basis points. This margin is the difference between earnings from loans made and payouts for deposits taken in.
There is a risk here, of course, that interest rates peak and then fall sooner than expected, so reducing profits. Another is that existing high rates may cause more loans to turn bad.
In the case of the latter, though, Lloyds has already tried to mitigate some of this risk. This has been done through a £662m impairment charge to cover balance sheet damage caused by the UK’s cost-of-living crisis.
Another positive for me is that Lloyds is looking to better balance its domestic and international presence.
Through its Corporate & Institutional banking business, it wants to expand its trading and origination capabilities across several markets. These include debt capital markets, foreign exchange, and fixed income.
This might widen the scope of international investors interested in buying its stock, I think.
A future dividend star?
In 2022, the bank paid out 2.4p per share in dividends. This gave a yield of 5.3% at the time.
Its strong H1 results enabled it to increase its interim ordinary dividend by 15% — to 0.92p. If this increase was applied to the final dividend, the yield on a share price of 43p would be 6.4%.
This may become even better, with analysts’ dividend expectations of 3.12p, and 3.52p for 2024 and 2025, respectively. If the share price stayed where it is now, the payouts would be 7.3% and 8.2%, respectively.
This would elevate Lloyds into the rarefied tier of top FTSE 100 stocks that pay 8% or more in yields. By comparison, the current average yield of the benchmark index is 3.9% only.
I already have holdings in Lloyds and buying more would make it too big in my portfolio. But if I did not, then I would buy it now for its current yield and future yield potential.
I also think that share price gains may be made over time. Together, I think these opportunities make the Lloyds price one of the best bargains in the FTSE 100.
