Since I last wrote about Lloyds Banking Group (LSE: LLOY) on 24 February, the stock has moved around 10% higher. But near 44p, it still looks cheap against conventional valuation measures.
Lloyds Banking Group stock looks cheap
For example, the price-to-tangible asset value is close to 0.8. And the forward-looking earnings multiple for 2022 is just below nine. On top of that, shareholder dividends are back on the agenda. And at this share price level, the anticipated yield for next year is above 5%.
City analysts expect a strong recovery in earnings. They’ve pencilled in a robust, triple-digit percentage rise this year, followed by a further advance of around 16% in 2022. If this was a growth business, I’d be licking my lips for such a strong earnings outlook at such a modest valuation. But it isn’t.
Neither is Lloyds Banking Group stock a decent income play, in my view. The yield is high now, but there’s a long record of volatility when it comes to shareholder payments. And the reason is that revenues, earnings and cash flow have been volatile as well. It hardly needs mentioning that the multi-year share price chart looks like a choppy sea. But overriding those ups and downs, a clear long-term downtrend has been in place for the entire century, so far.
Will that all change soon? I don’t believe so. Tempting as it might be to analyse Lloyds as a growth proposition, or an income stock, I’m not going to. There’s only one way I’ll look at Lloyds and that’s through the lens of its cyclicality. And banks are among the most cyclical businesses that exist. They’re joined at the hip to the ups and downs of the wider economy. And that’s why the stock has been shooting up recently.
A short-term flutter?
In fairness, I don’t reckon the short-term up-move has run its course. Those analysts predict earnings will be back near their pre-Covid highs by 2022. So I see every reason for the share price to get back to its 2019 level just above 60p. And my guess is it’ll probably get there by the end of this year and maybe well before that. However, I reckon it’ll struggle to make progress beyond that because of the possibility of valuation contraction.
We saw that between the financial crisis and the Covid-crash. Earnings kept notching up, year after year, but the valuation kept clicking down to compensate. And there was a good reason for that. The stock market ‘knows’ all about the cyclicality in the underlying business, so it waits for the next crash in earnings. And that’s especially true after a long period of high profits.
The Lloyds Banking Group stock valuation looks cheap right now, but it probably isn’t. And earnings are almost back to their previous highs, making the investment proposition less attractive to me, at least in the long term.
I’d buy Lloyds shares now for the rest of the short-term move I reckon is coming. But I’d keep one hand on the ejector seat lever.