Lloyds shares are on a roll. Is this a trap?
Lloyds Banking Group (LSE: LLOY) shares have long been considered a ‘value trap’ by certain market pundits. In some ways, I agree, because the Lloyds share price hasn’t maintained much upward momentum since the global financial crisis of 2007/09.
The ups and downs of the Lloyds share price
At their 52-week high on 3 February 2022, Lloyds shares hit 54.5p. Three weeks later, Russia invaded Ukraine and stock markets dived. At its 2022 low, the share price crashed to 38.1p on 7 March.
To me, the one-year chart of Lloyds share price resembles the teeth of a saw: up and down and up and down. Yet the shares have made a little progress over 12 months, as this table shows:
The Lloyds share price had a positive start to 2023, gaining 12% in the first month. It’s also up more than a sixth over six months, but just 3.4% over the past year. That’s slightly behind the wider FTSE 100 index, (+4.2% over the same period). You see what I mean about it lacking price momentum?
At its 2022 high, the Lloyds share price hit 56p on 17 January. Today, it hovers only 5.8% below that peak. This gives the Black Horse bank a market valuation of £35.5bn, making it a FTSE 100 heavy hitter.
Value trap or bargain buy?
My wife bought Lloyds shares at 43.45p in late June 2022. With the share price standing at 52.77p, our stake is up by more than a fifth (+21.4%) in seven months. I’m happy with this paper gain so far, given that Lloyds is often seen as a ‘boring’ value share.
But dark clouds are gathering over British banks. On one hand, rising interest rates are boosting banks’ lending margins and delivering higher net interest income. On the other, soaring prices and sky-high energy bills are hammering disposable incomes.
Also, higher mortgage rates mean higher monthly mortgage repayments. Eventually, this could increase bad debts and loan losses. Indeed, I expect Lloyds’ write-downs in 2023 to be well ahead of 2022’s figures. Like it or not, the UK is heading for recession, which is bad news for banks.
Value trap or bargain buy? Neither!
Lloyds stock is widely held and heavily traded, so hundreds of thousands of investors follow its price action (including me). But while I would argue that Lloyds shares are not expensive right now, I also feel that they are no longer amazingly cheap.
The stock trades on a price-to-earnings ratio of 8.7 and an annual earnings yield of 11.5%. While this is ‘cheaper’ than the wider FTSE 100, it may reflect a market discount due to the group’s heavy exposure to an ailing UK economy.
While the bank’s dividend yield of 4% is in line with the wider Footsie, it is covered a generous 2.8 times by earnings. That’s is a solid margin of safety. So would I buy Lloyds shares right now? I think not, because we already own some and the stock doesn’t appear screamingly cheap today!
The post Lloyds shares are on a roll. Is this a trap? appeared first on The Motley Fool UK.
Cliff D'Arcy has an economic interest in Lloyds Banking Group shares. 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.
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