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Looking to outperform the FTSE 100? I’d buy the Lloyds share price

Rupert Hargreaves
View of Canary Wharf

The FTSE 100 may have experienced one of its best years on record in 2019, but there are still companies in the index that appear to offer excellent value for money at current levels.

One of these companies is the UK’s largest mortgage lender, Lloyds (LSE: LLOY). Investors in Lloyds saw a healthy return last year with the stock returning 24.4%, outperforming the FTSE 100 by nearly 10% including dividends.

However, despite this performance, the share price still appears to offer value at current levels.

Indeed, the stock currently trades on a price-to-earnings (P/E) ratio of 8.5, which suggests that it offers a wide margin of safety. On top of this attractive valuation, it supports a dividend yield of 5.3%.

While the Lloyds share price outperformed the market last year, its long-term performance is disappointing. Over the past 10 years, the stock has produced a total return for investors of just 3.1% per annum, substantially below the FTSE 100’s total return of 7.2% per annum over the same time frame.

Exposure to the UK economy

Lloyds’ exposure to the UK economy seems to have contributed to its lacklustre share price performance over this time, and even more so since 2016. Investors have been cautious about the UK economic outlook following Brexit, and continue to remain apprehensive about what the future could hold for the economy.

The bank’s recent trading updates have only confirmed these worries, although Lloyds is doing everything it can to protect itself from the impact of any economic turbulence.

Aside from these concerns, the lender looks to be firing on all cylinders. City analysts are expecting the group to report a substantial increase in net profit this year and a 16% jump in earnings per share.

Last year, the bank also received a boost from the PPI claims deadline. While there was a final surge of claimants looking to lodge a complaint before the deadline, over the next year or so, the group’s bottom line should start to see a substantial improvement as it no longer has to pay out for historical claims.

At the same time, Lloyds is removing additional costs from its business and moving as much of its infrastructure online as possible. This investment in digital capabilities should help improve profit margins and efficiency across the group. This is another factor that could have a considerable positive impact on the bank’s bottom line.

Outperform the FTSE 100

While Lloyds’ performance could be held back by Brexit negotiations over next few months, for investors with a long-term view, the bank’s growth initiatives and income potential could help the stock outperform the FTSE 100 in 2020.

As such, now could be the right time for investors to snap up a share in this business at a discount valuation and take advantage of its attractive risk-reward potential, as well as the group’s growing income stream.

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Rupert Hargreaves 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 2020