Isn’t it great when one of your favourite companies turns into one of your worst ever investments? That’s what’s happened to me with Lloyds Banking Group (LSE: LLOY). The Lloyds share price has fallen more than 50% since I bought. And just when I was hoping for a better year in 2020, along came Covid-19 and hammered down any hope for recovery.
But if you’re tempted to buy at today’s depressed price, what do you need to know?
I can see sentiment towards Lloyds being negative for some time to come. We’ve had the banking crash, an oil price slump or two, Brexit, Covid-19. And we’re now facing the worst recession for decades. None of that says anything positive for banking sector outlook. And with dividends suspended, we don’t even have any regular income to compensate for the dreadful performance of the Lloyds share price.
But that’s all sentiment, so are there any hard fundamentals that count against Lloyds right now? We’re likely to see earnings per share pretty much devastated this year, so it probably doesn’t make a lot of sense to rely on 2020 figures for any long-term planning.
Lloyds share price valuation
But based on 2019 results, the current Lloyds share price indicates a trailing P/E of just eight. That’s way below the FTSE 100‘s long-term average of around 14. Analysts expect Lloyds to get back to similar levels of earnings by 2021. Even if it takes a bit longer than that, we’re still looking at a very low eventual forward P/E. That suggests good value to me.
What about Lloyds’ price-to-book ratio? That stands at around 0.4 now, approximately two thirds of the current UK financial sector average. Again, that makes the Lloyds share price look cheap to me.
Cash and liquidity
Dividends? We really can’t guess at when the sector will be allowed to reinstate them. The regulators really do seem to be doing everything they can to ensure the banks make it through and are able to support our eventual emergence from the current recession. Maybe the suspension of dividends was needed, maybe it wasn’t. Either way, Lloyds has been sailing through the regular Bank of England stress tests with ease.
Had this Covid-19 pandemic hit us when Lloyds was recklessly overstretched along with its competitors, the Lloyds share price would surely have been hammered way harder. But as it is, I don’t see Lloyds as being in any actual danger now.
Maximum pessimism
I’ve examined my fellow Motley Fool writers’ opinions on Lloyds. And what I’m seeing is general agreement that Lloyds is in for a horrible year. But also the feeling that markets have overreacted and the Lloyds share price is undervalued.
I’m seeing a general consensus that Lloyds is a quality company run by very competent managers. That the Lloyds share price reflects the very worst possible outcome for every adverse factor affecting the banks. Oh, and that we could still face some serious volatility until Covid-19 and Brexit are finally behind us.
In short, I’m seeing a share price that reflects maximum pessimism. I reckon that’s the perfect buy indicator.