Stock market

Is Lloyds’ share price really that cheap? I don’t think so!

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At first glance, the Lloyds Banking Group (LSE:LLOY) share price offers outstanding value, at least on paper.

Black Horse Bank trades at a forward price-to-earnings (P/E) ratio of 8.7 times. It’s down to comfort. FTSE 100 11 times on average. Its dividend yield of 5.8%, meanwhile, is higher than the Footsie average of 3.5%.

But scratch a little deeper, and suddenly the FTSE bank doesn’t look like such a fantastic bargain. So how cheap is it? are Its shares? And what should I do now?

Earnings

Sometimes, comparing a stock’s P/E ratio to a broader index is like comparing apples and oranges. Footies covers a wide range of industries, each with different growth expectations, risk levels, and economic cycles, among other factors.

As a result, it’s also a good idea to compare how Lloyds shares compare in terms of value with other major banks. Here is what my research shows.

Bank Forward P/E ratio
Natwest Group 7.9 times
Barclays 6.9 times
Standard Chartered 6.1 times
HSBC Holdings 7.1 times
Banco Santander 6.6 times
Lloyds Banking Group 8.7 times

As you can see, Lloyds is more expensive than any of its London-listed rivals, based on forecast earnings. Across this grouping, the average P/E ratio is 7.2 times.

It is important to note that the difference is not huge. Also, remember that these are based on broker forecasts rather than actual earnings (unlike multiples of previous earnings).

profit

Next is to look at how cheap Lloyds looks on a profit basis. Here, the result is far more encouraging.

Bank Forward dividend yield
Natwest Group 5.2%
Barclays 3.9%
Standard Chartered 3.1%
HSBC Holdings 10%
Banco Santander 4%
Lloyds Banking Group 5.8%

Apart from HSBC – whose forward dividend yield is in the double digits – the company beats every major rival on this metric. The average dividend yield in this group is 5.3%.

Like earnings, these dividend yields are based on City estimates rather than concrete numbers.

Decision

So what do I do next? Clearly, Lloyds could be a great buy if I’m looking for a big passive income in 2024.

In fact, it could be a nice dividend payer beyond that, with City analysts predicting continued dividend growth until at least 2026.

But there’s more to share selection than just buying them based on predicted profits. Even if payout forecasts prove accurate, a stock may provide poor overall returns if its share price declines.

This is my fear when it comes to buying Lloyds shares. The bank’s role as a major mortgage provider should position it well as the housing market recovers. But, on balance, in my opinion, the outlook here is pretty bleak.

Increased competition, collapsing margins with falling interest rates, and weak economic conditions in the UK mean its share price looks set to remain well below pre-2008 levels.

And not just based on forecast earnings, Lloyds is more expensive than all of its rivals. It also lacks the overseas exposure of most of its named rivals, allowing it to grow profits even as the British economy struggles.

On balance, I will look for other bargain stocks on the FTSE 100 today.


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