Tempted by Lloyds’ share price? Here’s what you need to know

Lloyds Banking Group plc (LON: LLOY) shares trade on a P/E ratio of just seven. Is that a bargain or a trap?

| 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.

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.

Lloyds Bank (LSE: LLOY) shares look cheap at the moment. At the current share price of 57p, Lloyds trades on a forward-looking P/E ratio of 7.3, while the prospective dividend yield on offer is a high 6%. By contrast, the median FTSE 100 P/E is 14.1 and the median yield is 4%.

However, before you rush out and buy the shares because they’re cheap, it’s important to stop and consider the risks of investing in the bank. Here are four risks you should know about.

The UK economy

The first risk that comes to mind in relation to Lloyds is its exposure to the UK economy. As a domestically-focused bank and the largest provider of mortgages in the UK, Lloyds is essentially a play on the UK economy and the housing market.

Should you invest £1,000 in Lloyds Banking Group 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 Lloyds Banking Group made the list?

See the 6 stocks

Brexit certainly adds uncertainty here. While UK growth came in at 0.5% in the first quarter, the Bank of England (BoE) recently warned that the economy would flatline in the second quarter and slashed its forecast to zero from a previous estimate of 0.2%. A severe economic contraction or housing market crash as a result of Brexit could see Lloyds’ profits dry up.

UK interest rates

Interest rates are another issue to consider. Last summer, the BoE lifted interest rates to 0.75%. Now, however, with the possibility of a no-deal Brexit increasing, there is talk of an interest rate cut. This would hurt Lloyds, and the banking sector in general, as higher interest rates are better for banks as it enables them to earn a larger spread between the money they borrow and the money they lend out.

PPI claims

Investors also shouldn’t ignore PPI claims. The deadline for PPI claims is 29 August, so hopefully this issue – which has seemingly dragged on forever – will be put to bed soon. However, in the short term, we could see a rush of claims submitted before the deadline. This could hit near-term profits.

The FinTech threat

Finally, don’t forget about the threat of new entrants into the banking sector. New digital banks and innovative FinTech firms are completely overhauling the banking industry right now and if the traditional banks aren’t careful, they could lose customers.

A great example of how digital banks are making life easier for consumers is account opening. If you want to open an account with a traditional bank you often have to visit a branch and speak to an adviser. Then, you’re looking at a seven-day wait for your debit card. However, with new digital banks such as Monzo, you can open an account online within minutes and have access to a digital card immediately.

Lloyds is focusing on becoming more digital. However, it needs to ensure that it continues innovating or it could be at risk of losing customers to new players.

Worth buying?

Do Lloyds shares have investment appeal given these risks?

Personally, I do still see appeal. The dividend yield of 6% is attractive, and dividend cover appears to be solid, suggesting a dividend cut is unlikely in the near term. I also think the current valuation reflects the risks. In my view, Lloyds shares remain a solid buy-and-hold income investment.

Should you invest £1,000 in Lloyds Banking Group 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 Lloyds Banking Group 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.

Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.

More on Investing Articles

Investing Articles

I asked ChatGPT to build me the perfect second income portfolio and here’s what it said

Millions of Britons invest to earn a second income, but with artificial intelligence getting better by the day, this Fool…

Read more »

Investing Articles

P/Es below 8 and dividend yields above 6%! 3 bargain UK shares to consider

Looking for cheap UK shares to buy today? Here are three terrific options, whose P/E ratios and dividend yields demand…

Read more »

Investing Articles

Down 16% in a month, is Tesla stock a falling knife?

Tesla stock has taken a tumble over the past few weeks. Christopher Ruane is itching to buy it at the…

Read more »

Close-up of British bank notes
Investing Articles

£9K of savings? Here’s how that could produce £108 a month in passive income

£9k could earn over £100 a month in passive income if invested in the right selection of blue-chip shares over…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how an investor could start buying shares like a billionaire – for £800

By learning some lessons from billionaire investors like Warren Buffett, a market newcomer could start buying shares on a limited…

Read more »

Investing Articles

6.9% yield! I like this FTSE 100 dividend stock as I aim for big passive income

I love a good dividend stock, especially one with its share price unjustly depressed and the yield pushed up. Does…

Read more »

Mature people enjoying time together during road trip
Investing Articles

Here’s my strategy to enjoy a first-class retirement with passive income from UK dividend shares

Mark Hartley outlines his long-term plan to earn a lucrative second income in retirement by investing in high-yield dividend shares.

Read more »

Investing Articles

Here’s how I go about building my perfect Stocks and Shares ISA

By following a few simple steps, our writer aims to build a brilliant Stocks and Shares ISA for the long…

Read more »