The Lloyds (LSE: LLOY) share price was comfortably above 60p going into 2020. By September, it had reached a multi-year low of 24p. We’ve seen a recovery since, but the price remains well below its pre-pandemic levels. If it were to return to those levels, the upside for current buyers would be 35%+. Should I be one of those buyers?
Lloyds’ recovery
Lloyds’ shares moved steadily higher through the first half of this year. They traded at between 40p and 45p through much of March and April. The range moved up to 45p-50p through May and June. In an article just after the half-year-end, I discussed whether the steady upward progress would continue in July and August. Could we perhaps have expected the shares to trade between 50p and 55p?
That hasn’t happened. The shares largely remained in the 45p-50p range, but have closed below 45p for the last nine trading days in a row. Has the recovery stalled, or can it get back on track towards 60p?
Results hit Lloyds’ share price
Lloyds published its second-quarter and first-half results on 29 July. The market knocked the shares down 1.2% to 46.2p. This on a day when the FTSE 100 rose 0.9%
On the face of it, the bank’s headline numbers didn’t appear to warrant a frosty reception. The table below shows the Q2 analyst consensus forecast going into the results and the numbers Lloyds delivered.
|
 |
Consensus |
Actual |
|
Net income |
£3.7bn |
£3.9bn |
|
Profit before tax (PBT) |
£1.2bn |
£2.0bn |
|
Earnings per share (EPS) |
1.6p |
3.3p |
|
Dividend per share (DPS) |
0.56p |
0.67p |
The firm beating consensus net income by £0.2bn was a positive. It helped it beat consensus PBT, but a bigger contributor was Lloyds booking a £0.3bn impairment credit versus forecasts of a £0.3bn debit. In normal times, an impairment credit is unusual. This one was a partial reversal of the equally unusual (by size) £4.2bn pandemic-induced impairment the bank took in 2020.
Nevertheless, it represents an abnormal boost to 2021 PBT. Another flattering distortion — at the after-tax-profit and EPS levels — is a tax credit in the quarter of £0.5bn. Obviously, in normal times, Lloyds is paying tax.
Valuation
City analysts appear to expect impairments and tax to normalise next year. So, in valuing Lloyds, I’m looking at the 2022 consensus as more representative of its profitability. This has PBT 10% below an inflated 2021 level and EPS 20% lower.
When I look at Lloyds’ sub-45p share price on the 2022 numbers, the price-to-earnings (P/E) ratio is less than eight and the dividend yield is more than 5.5%. This looks overly generous to me. If the shares were to return to 60p, the P/E would only just be into double figures and the yield would be above 4%. This is a more reasonable valuation for the UK’s top bank, in my book.
Of course, the analysts’ 2022 forecasts are based on current assumptions about the trajectory of the pandemic and UK economy. There’s a risk those assumptions could turn out to be too optimistic. If so, Lloyds’ performance may not merit the 60p-a-share valuation I think is reasonable. However, I see a margin of safety in the shares at sub-45p, and this gives me confidence to buy the stock.