Many UK investors keep a close eye on the Lloyds (LSE: LLOY) share price. It’s a mainstay in many portfolios. The question is: after the share price has risen by about 50% over the last 12 months, are the shares still cheap?
On the face of it, Lloyds appears expensive with a price-to-earnings ratio of 39. I think the ratio has been skewed by the bank’s lower earnings during the pandemic. If we look further out, the P/E is expected to come down to around eight, as earnings recover. Other valuation metrics also point to Lloyds being pretty decent value. For example, the price-to-book ratio is 0.68, indicative of very good value.
When compared to Natwest, another UK focused bank, I’d suggest Lloyds continues to look cheap. Natwest has a forward P/E of 10.
A recovery in the dividend may also make Lloyds share appealing to dividend growth investors.
Lloyds to become a private landlord
Sources in the City have recently revealed that Lloyds is set to become a private landlord. The plan, codenamed ‘Project Generation’, is aimed at bringing in another source of income for Lloyds. The plan seems well advanced — there’s a registered subsidiary, Citra Living, and rumours that it’s close to securing a block of flats in Nene Wharf, Peterborough.
In recent years the bank has also expanded into wealth management. These moves have been designed to help combat the long period of very low interest rates and even the threat of negative interest rates.
If this latest growth initiative, alongside its move into wealth management, succeed, and the UK economy recovers as expected, it could potentially make the Lloyds share price look cheap. That’s even after the recent share price recovery.
A rise in interest rates?
As inflation has crept up so inevitably has the potential for higher interest rates. I personally wouldn’t base any investment in Lloyds now on that possibility, as a rise could be years away, but it’s something to consider.
A rise in interest rates, whenever it happens, should be good for the profitability of all banks. That’s generally accepted among investors and economists as being the case.
What could hold back the Lloyds share price?
Of course, the Lloyds share price could be held back by any number of foreseeable or unknown developments. The principal concerns I’d have about adding the share to my portfolio would be Lloyds’ lack of international exposure and investment banking. It’s very reliant on UK retail banking. In turn, that means any economic downturn will likely hit it harder than other banks that are more diversified.
Although the Lloyds share price could rise further, I won’t be adding it to my portfolio. I think there are better investing opportunities both in the FTSE 100 and the wider UK stock market.
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Andy Ross owns no share 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.
Motley Fool UK 2021