Lloyds Banking Group (LSE: LLOY) has done well so far in 2021 and, over the past 12 months, it’s up more than 50%. But the Lloyds share price remains stubbornly short of the 50p level, briefly exceeding it in June, but then quickly falling back.
As a long-term Lloyds shareholder, should I give up on waiting and sell? Or should I buy more? I can see arguments from both sides.
The reason to buy now is a simple one. Valuation. Looking at fundamental measures alone, ignoring the underlying business (which I’ll come back to), Lloyds does look cheap to me. But after the pandemic crash, it takes a bit of digging for me to get to it.
On the face of it, the Lloyds P/E multiple might seem high. I’ll leave out forecasts, as they’re surely even less certain than usual right now. Lloyds ended 2020 on a P/E of around 30, after a big Covid-crunched profit drop, and that’s not great. But if Lloyds can get profits back somewhere around 2018 and 2019 levels, that could come tumbling down.
P/E set to fall?
On today’s Lloyds share price, EPS figures in the pre-pandemic range would give us a P/E somewhere between eight and 14. At the upper end, I’d say that’s fair. At the lower end, I reckon it’s cheap.
My favourite valuation metric though, is dividend yield. After all, I bought Lloyds for dividend income. Lloyds had to withhold dividends during the pandemic on the instructions of the Prudential Regulation Authority. But at Q1 time the bank said it has been “accruing dividends with intention to resume progressive and sustainable ordinary dividend policy.”
So we should get them back. And pre-pandemic levels would yield around 6.5%, or better. These two measures, P/E and dividend yield, make me think the Lloyds share price is too low now.
Economic outlook
This all assumes that the future for Lloyds as a business is all rosy. And it might not be. My Motley Fool colleague Royston Wild has outlined what he sees as the bearish side of Lloyds.
In short, it’s our fragile economic outlook. Never mind pundits who are going on about how well we’re recovering now lockdown measures are easing. No, that recovery is from a very low level to a not-much-higher level.
Covid-19 restrictions look set to be fully lifted later this month. So will that signal a new economic surge? Maybe, but maybe not. Even the new health secretary Sajid Javid is suggesting new cases could rise to as high as 100,000 per day. And in Wales, ministers are suggesting that we need to learn to live with Covid.
Lloyds share price pressure
Royston also points to the current low-interest environment, which isn’t great for banks. He suspects, and I agree, that we’ll have low rates for quite some time to come. I can’t see them rising until we’re firmly back into economic growth, which I don’t expect any time soon.
So what’s my take, buy or sell? The key thing for me is Lloyds’ apparent confidence in the future of its dividends. At today’s Lloyds share price, I’m more likely to top-up than sell.