What’s the point of Lloyds shares?

With Lloyds shares trading close to their 52-week low, our writer is starting to question whether he should sell his stake in the bank.

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My Lloyds Banking Group (LSE:LLOY) shares continue to frustrate me. I’ve held the stock for several years but it never reaches the heights that I (and some others) think it should.

I’m beginning to wonder whether the time has come to cut my losses.

Fundamentals

But before making a decision, I think it’s sensible to take a step back and look at the bank’s underlying worth.

A common way to value a financial institution is to compare its stock market valuation with its balance sheet.

Lloyds’ market cap is currently £25.4bn. And at 30 September 2023, its net assets were £45.0bn. This means its price-to-book ratio is currently 0.56, implying that the stock is undervalued.

Put another way, if it ceased trading today, and all its assets were sold for their accounting value and the proceeds used to pay down its liabilities, there would be enough left over to give shareholders 70.8p a share.

That’s a 76% premium to its current share price.

And the main reason why I plan to hold on to my shares.

Not alone

But it doesn’t matter what I think. If the majority of investors fail to believe the bank is undervalued, then its share price will continue to struggle.

However, I don’t appear to be the only one who thinks the stock price doesn’t reflect its intrinsic value.

During the week ended 27 October 2023, on the Hargreaves Lansdown trading platform, 4.21% of all ‘buy’ deals were for Lloyds shares, making it the second-most popular.

And a number of analysts believe that the share price should be higher. UBS (50p), Bank of America (58p), Barclays (67p), and Jefferies (80p), all argue that the stock should change hands for more.

Increasing shareholder returns

But even if the share price doesn’t increase much over the coming months and years, I think there’s another reason why I should retain my shares: the dividend.

Based on the consensus forecast of 20 analysts, the bank is expected to pay 2.70p a share in 2023. That’s a current yield of 6.75%.

And its payout is expected to increase steadily over the next three years — 3.03p (2024), 3.35p (2025), and 3.71p (2026).

Of course, these forecasts could be wrong.

The bank is heavily exposed to the UK economy and, in particular, the domestic housing market. Inflation and rising interest rates have damaged the country’s growth prospects. And they have made owning a home increasingly unaffordable.

The Bank of England has forecast that the economy will be smaller in 2026 than it was in 2019.

A balancing act

But Lloyds’ earnings are benefitting from higher interest rates.

Its net interest margin — the difference between the amount it receives on loans and what it pays on deposits — was 3.15% for the nine months ended 30 September 2023. For comparison, it was 2.94% in 2022, and 2.54% in 2021.

However, the downside of this is the prospect of more customers defaulting on their borrowings.

I’m going to review my decision to keep my Lloyds shares after its full-year results are announced in February 2024.

By then the growth prospects for the UK economy will be clearer and the dividend for 2023 will be confirmed. And hopefully, other investors will also be convinced that the bank is undervalued.

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.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Beard has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc, Hargreaves Lansdown Plc, and 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.

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