Should I buy cheap Lloyds shares while they’re still under 50p?

·3-min read
Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Image source: Getty Images

Back in early March, Lloyds (LSE:LLOY) shares traded at around 51.46p before plunging 10% in a matter of weeks.

Since then, the bank’s share price has gradually been increasing, but it’s yet to recover to the 50p mark.

As I write, the group’s shares are trading at approximately 48p. So, could now be a good time for me to buy some Lloyds shares for my portfolio?

The shares look cheap

The FTSE 100 banking group trades on a price-to-earnings (P/E) ratio of around 6.6. This suggests to me that the shares could be undervalued at their current price.

That being said, a relatively low P/E ratio isn’t enough to convince me that a particular company’s shares are priced below their intrinsic value.

To determine that, I’m looking to factor in the company’s recent financial performance and assess their future prospects.

A robust financial performance

A few months ago, Lloyds reported full-year net income of £18bn, up 14%. This was fuelled by higher net interest income, which benefited from an increase in UK interest rates.

The net interest margin (or NIM, which is the difference between what a bank earns in interest and pays on deposits) rose from 2.54% to 2.94%.

A positive NIM indicates that an entity operates profitably, while a negative figure would imply investment inefficiency.

The risky balancing act

Despite demonstrating a robust financial performance in an uncertain macroeconomic environment, analysts have pointed out how the group’s full-year results are testament to the fine line banks are walking.

Higher interest rates mean Lloyds can make more money from the difference between borrowing and lending rates. However, preparations for higher debt defaults in light of the cost-of-living crisis represent the other side of the coin.

What’s more, Lloyds’ greater focus on traditional banking means the group has more exposure to the interest rate cycle than others. To illustrate this, 73% of the bank’s total income is interest-related.

Competitive advantages

Nonetheless, I admire Lloyds because it has a number of distinct competitive strengths that collectively differentiate its proposition.

For example, the group’s scale and reach across the UK means that its franchise extends to 26m customers, with 19.8m digitally active. Lloyds truly is a titan in the British banking world.

In addition, I like that the group has a strong capital position yet continues to take a disciplined approach to risk. This is reflected through the quality of its portfolio and its underwriting criteria.

Trusted brands such as Halifax, Scottish Windows and Bank of Scotland have helped Lloyds create a significant customer deposit base. This has also enabled the group to maintain its strong funding and liquidity position.

As such, with a generous dividend yield of 4.9%, I’d gladly have taken the opportunity to snap up some Lloyds shares while they’re still under 50p.

Unfortunately, I’ve not got any spare cash lying around, so I’ll be watching on from the sidelines for now.

The post Should I buy cheap Lloyds shares while they’re still under 50p? appeared first on The Motley Fool UK.

More reading

Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.

Motley Fool UK 2023