Lloyds (LSE:LLOY) shares are among my biggest holdings. The stock has seen some downward pressure in recent months, but not as much as its peers.
The bank is down around 12% from its highs earlier in the year — Silicon Valley Bank (SVB) is largely to blame. That’s not great for my holding, but there’s definitely an upside. I believe the SVB fiasco and the resulting panic that impacted most banks has created an excellent buying opportunity.
But I’m not just buying more because I believe the stock is at a great price. It’s because I think it’s a great company.
Let’s explore why.
Valuation
The first place to start is the valuation. Lloyds shares trade at just 6.7 times earnings. That means its one of the cheapest companies, using the price-to-earnings metric, on the FTSE 100. In fact, Lloyds’ P/E ratio is approximately half that of the index.
We can also look at the discounted cash flow metric. This is a method that estimates the value of an investment using its expected future cash flows and subtracting a discount rate which reflects the time value of money.
I didn’t do my own DCF model this time, but looking at other analysts’ models, I can see that Lloyds could be undervalued by as much as 60%. That’s huge — remember legendary investor Warren Buffett tends to look for stocks that are undervalued by 30%, or more.
So according to these two metrics alone, Lloyds looks cheap right now. We can also couple this with the juicy 4.8% dividend yield. At the current price, and using a forecast for 2024, the dividend yield could reach as high as 6%.
A bright future
Interest rates are high right now. And after recent UK inflation data, there’s a suggestion that the Bank of England will need to raise rates in the near term. But hopefully, we can still expect to see central bank rates fall before the end of the year.
Higher rates mean higher net interest margins and greater interest income on assets held with the central bank. But it also means less business and higher impairment charges as debt turns bad.
This is a real concern now, especially in the UK. Lloyds is heavily focused on the UK mortgage market, and amid a cost-of-living crisis, many people are struggling with their elevated repayments.
Ideally, banks should perform best with central bank rates around 2-3%. At this level, net interest margins are elevated versus where they have been over much of the last decade, but there should be less impairment charges on bad debt.
Thankfully, this is where central bank rates are heading, and are expected to stay, in the medium term. So I’m actually buying more Lloyds shares now for the next 3-6 years, during which I think banks will really prosper.
The post Lloyds shares have a bright future! Here’s why appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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More reading
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I think investors should buy Lloyds shares for lower interest rates!
James Fox has positions in Lloyds Banking Group Plc. 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.