On Wednesday, the Lloyds share price closed at 44.02p. Lloyds has 71bn shares outstanding, so the bank is valued at £31.2bn, making it a FTSE 100 stalwart. But the stock has weakened since June. Is it a bargain or a value trap today?
The Lloyds share price roller-coaster
Since early 2020, the Lloyds share price has been a roller-coaster ride. During the 2020 Covid-19 crisis, the stock slumped to fresh lows. On 22 September 2020, it crashed to an intra-day low of 23.58p. Just two days later, I said: “I see a lifetime of value in Lloyds” at 24.58p. And, as mass-vaccination programmes got underway in 2021, the shares duly doubled.
On 1 June, the Lloyds share price hit 50.56p, a 52-week high. However, since June, the stock has been in decline. At today’s price, it’s down 12.9% in three months. Then again, the shares are up over six months (+13.2%) and have soared over one year (+62.9%). But the stock has lost more than a quarter (-27.8%) of its value over five years. Also, the price is down 4.8% over one month (but remember that this is during the market’s usual summer lull).
Lloyds is in good shape
Looking at the bank’s half-year results, things look pretty rosy. Total income in H1 2021 was £19.6bn, almost treble the £6.9bn of H1 2020. Likewise, the bank went from a pre-tax loss of £0.6bn in H1 2020 to a profit of £3.9bn this time. This propelled earnings per share — a key driver of share value — from a loss of 0.3p to a healthy profit of 5.1p. So, everything’s great, right? Not exactly, because Lloyds’ latest results were flattered by large loan write-backs going straight into its bottom line.
I’m a sucker for a bargain and am always on the lookout for quality shares trading at lower prices. But often there are reasons for share-price declines, such as reduced future business prospects. For example, this could be the UK economy slowing down, or more coronavirus variants hitting consumer spending. But let’s review the firm’s value characteristics. At the current Lloyds share price, the stock trades on a price-to-earnings ratio of 6.7 and an earnings yield of 14.9%. That’s about half as expensive as the wider FTSE 100 index. Lloyds offers a dividend yield of 2.8% a year, almost a percentage point lower than the Footsie’s forecast yield of 3.7% a year. But the dividend has scope to return to its former heights.
Now let’s check out Lloyds in terms of three other metrics. First, its net asset value of 73p a share is well above its stock price. Second, the bank’s return on tangible equity (ROTE) soared to 24.4% in Q2, versus a mere 5.9% in Q4 last year. Third, Lloyds’ common equity tier 1 (CET1) ratio — a key measure of its financial strength — increased to 16.7% at the end of June, well above its regulatory minimum of 11%. This implies that the bank has billions in spare capital.
Time to sum up. For many years, Lloyds was regarded as a classic ‘jam tomorrow’ value stock. For me, the shares have fallen behind the bank’s underlying business prospects. Today, I see Lloyds as a geared play on any future UK economic recovery. I don’t own Lloyds stock, but I’d happily buy at current levels. That said, if we don’t get coronavirus under control, I fear for British banks!