Is Lloyds’ share price now too cheap for me to miss?

The Lloyds share price is looking incredibly cheap from both an earnings and income perspective. Should I buy it for my UK shares porfolio today?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

The Lloyds Banking Group (LSE: LLOY) share price is on a major rollercoaster ride. The FTSE 100 bank isn’t alone in suffering extreme turbulence, of course, as investors digest the potential impact of the Omicron variant on the economic recovery. However, a case can be made that Lloyds’ share price could now be too cheap to miss.

City analysts are expecting the bank’s earnings to drop 22% year-on-year in 2022. Next year’s projection leaves Lloyds trading on a forward price-to-earnings (P/E) ratio of just 7.4 times.

On top of this, number crunchers think Lloyds will have the financial strength to keep raising dividends next year, despite that expected earnings reversal. A 2.57p per share reward is currently anticipated, up from the 2.34p dividend that’s predicted for 2021. This results in a mammoth 5.4% dividend yield.

Cheap for a reason?

At a current price of 47.3p the Lloyds share price offers plenty of value on paper. Its P/E ratio for 2022 sits well inside the widely-regarded bargain benchmark of 10 times and below. Furthermore, that dividend yield for next year makes mincemeat of the FTSE 100 forward average of 3.4%.

However, I also think that Lloyds’ cheap valuation reflects the high threat that next year’s earnings dip could come in much worse than expected. It also illustrates the uncertain outlook for the UK economy over the long term. Highly cyclical shares like banks face the prospect of extremely weak profits growth in the shadow of a long economic hangover from Covid-19 and the stresses caused by Brexit.

Growing fears for Lloyds’ share price

My concerns over Lloyds have ratcheted up a notch or two in recent days. This is because the emergence of Omicron has increased the chances of subdued revenues growth and a tsunami of bad loans in 2022, possibly beyond. It’s early days of course and the harshness of this particular Covid-19 mutation is yet to be ascertained. But it’s something investors like me need to take seriously given the pandemic-related carnage dealt to banks last year.

The Omicron outbreak could also have a significant impact on the scale and timing of Bank of England rate rises. It had been suggested that Threadneedle Street could begin raising its benchmark as soon as next month. Such action might now be in jeopardy, dealing a further blow to Lloyds’ profitability. Higher rates allow banks to charge individuals and companies more to borrow their cash.

I’d buy other cheap FTSE 100 shares

Lloyds isn’t a complete basket case. Its shares could soar in price if the Omicron virus proves to be less dangerous than earlier assessments indicated. Profits could bounce if the housing market remains strong (Lloyds is by far the UK’s biggest home loans provider). Work to improve its digital operations could also pay off handsomely as online banking goes from strength to strength.

It’s my opinion that the risks outweigh the potential rewards, however. Sure, the Lloyds share price is cheap. But aside from those Covid-19-related worries, I also fear the bank has a lot to lose as competition in all its major product areas grows. This is why I’d much rather buy other cheap FTSE 100 shares right now.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Publish Test

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut…

Read more »

Investing Articles

JP P-Press Update Test

Read more »

Investing Articles

JP Test as Author

Test content.

Read more »

Investing Articles

KM Test Post 2

Read more »

Investing Articles

JP Test PP Status

Test content. Test headline

Read more »

Investing Articles

KM Test Post

This is my content.

Read more »

Investing Articles

JP Tag Test

Read more »

Investing Articles

Testing testing one two three

Sample paragraph here, testing, test duplicate

Read more »