A year ago, shares in Lloyds Banking Group (LSE:LLOY) were trading at around 45p. Now, the stock’s nearer the 60p mark.
There’s no question Lloyds shares were better value a year ago than they are today. But investors shouldn’t be too hasty in thinking they’ve missed the boat.
Expensive vs more expensive
There’s a difference between a stock being more expensive than it was and it being expensive, full stop. And arguably, the Lloyds share price is quite a good illustration of this.
Right now, the average price-to-earnings (P/E) ratio of the FTSE 100 is 15. Despite a stellar performance over the last year, Lloyds shares trade at a significant discount to this, at a P/E ratio of just under 8.
Equally, the average FTSE 100 stock trades at a price-to-book (P/B) ratio of 1.8. Again, Lloyds is much cheaper, at a P/B ratio of 0.77.
The share price might be 30% higher than it was this time last year, but it still looks cheap compared to the broader index. So it’s possible the stock has just gone from being great value a year ago to good value today.
Bank stocks
It’s worth noting that bank shares generally trade at lower multiples than other businesses. That’s because it can be harder to make money in the banking industry than elsewhere.
For one thing, profits can be highly cyclical – when interest rates are high, banks can generally earn more from the loans they issue, boosting their income. But the reverse is true when interest rates come down.
At the moment, it looks like an interest rate cut is on the cards this year. That might cause the likes of Lloyds to register lower profits and leave it unable to maintain its dividend payments.
It’s not all doom and gloom though. The worst outcome for banks like Lloyds is if borrowers default on their loan obligations and lower interest rates would reduce the chance of this happening.
What sets Lloyds apart?
It’s also important to think about what differentiates Lloyds from the other FTSE 100 banks. Both Barclays and NatWest trade at low P/E multiples and are to some degree sensitive to changes in interest rates.
One of the main advantages Lloyds has is its deposit base. It has the largest share of UK retail banking deposits and this helps protect it from a key risk for banks.
Banks use deposits to finance their lending activity. But a customer can ask for their money at any time and the bank doesn’t have ability to recall someone’s mortgage to cover it.
This is duration risk. The most effective protection is a large base of deposits that are unlikely to be withdrawn at the same time – and this is what a leading retail banking position gives Lloyds.
Is it too late to buy?
Lloyds shares used to be cheaper than they are now. But they still trade at a low P/E ratio compared to the FTSE 100 average.
This means the stock could be good value, even if lower interest rates weigh on future earnings. As a result, I don’t think it would be crazy to buy Lloyds shares at today’s prices.
The post Would I be crazy to buy Lloyds shares at a 52-week high? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and 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.
