2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8.8% this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) still offer good value, after five years of market gains.
Back to basics
Lloyds’ share price has risen by an impressive 57% this year, and by 220% over the last two years.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As potential buyers of Lloyds today, we need to ignore historic price action, and focus on what we can buy for our money today:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | n/a |
| Trailing dividend yield | 0% |
| Cost to income ratio | 50.1% |
| Net interest margin | 2.1% |
| Price to tangible book ratio | 1.5 |
These figures provide a potent reminder that Lloyds’ stellar performance this year has largely been based on a promise of good things to come.
Although the bank did report a third-quarter profit of 0.4p per share and reduce its loan impairments by 44% during the third quarter, in my view, these achievements are not enough to justify its current share price, which is 50% above its tangible book value.
Will Lloyds deliver in 2014?
Lloyds is expected to report earnings per share of 5.3p for the year ending 31 December 2013, placing it on a forecast P/E of 14. A dividend declaration is unlikely, but analysts have pencilled in a payout for the 2014 financial year, as these 2014 consensus forecast figures show:
| Metric | Value |
|---|---|
| 2014 forecast P/E | 11.1 |
| 2014 forecast yield | 3.1% |
| 2014 forecast earnings growth | 32% |
| P/EÂ to earnings growth (PEG) ratio | 0.4 |
Earlier this year, Lloyds chief executive António Horta-Osório told investors he wants to pay out 70% of earnings as dividends by 2015. This ambition is undoubtedly the driving force behind Lloyds’ rocketing share price, but it isn’t completely unrealistic.
Using Lloyds’ forecast 2014 earnings as a guide, the UK-focused bank could pay a dividend of 4.8p per share in 201, providing a yield of 6.2% at today’s prices. I reckon that market demand for income would push this yield down to around 5%, which would equate to a share price of around 95p, if everything goes to plan.