Until the stock market crashed in February 2020, Lloyds Banking Group (LSE: LLOY) hadn’t traded below 50p since 2013. I used to see this as a useful value indicator — if the Lloyds share price was close to 50p, I’d be happy to buy the stock.
That’s all changed over the last 18 months. Lloyds shares fell as low as 24p last year and have only got close to 50p once, earlier this summer. With the shares now yielding 5%, I’ve been taking a closer look to see if now’s the right time to buy. Here’s what I’ve found.
Why are Lloyds’ shares falling?
It was all looking so good earlier this year. The UK economy was recovering more quickly than expected from the impact of Covid-19, and the housing market was booming. Lloyds’ financial performance was ahead of expectations. The bank’s share price was rising steadily towards pre-pandemic levels.
However, market watchers will know that Lloyds’ share price has drifted steadily lower since the start of June. After briefly touching 50p, the shares have fallen by 10% to around 45p.
What’s gone wrong? Nothing really. The problem is that City analysts expect the bank’s profits to peak at £5.2bn this year, before falling to around £4.2bn in 2022 and 2023.
The stock market always looks forward. If a company’s profits are expected to fall, then its shares are likely to be rated cheaply by investors. I think that’s what’s happened here. Lloyds shares are now trading below their book value and on a multiple of just six times 2021 forecast earnings.
This could be a bargain
It’s worth noting that although Lloyds profits are expected to fall, analysts still expect steady dividend growth. This seems reasonable to me — the bank has plenty of surplus capital and the current payout’s covered around three times by earnings. I can see room for growth.
As a result, I think Lloyds could be a good income play at current levels. If broker forecasts are correct, anyone buying Lloyds shares at the current price could see their dividend yield reach 6% in 2023.
The market wants growth
In the meantime, new chief executive Charlie Nunn is focusing on two main areas to generate growth and improve profitability. The first is wealth management — selling asset management services to wealthy individuals. The second is a more dramatic shift. Lloyds aims to become one of the UK’s largest residential landlords, building and renting up to 50,000 homes.
I agree that renting properties could generate higher returns than mortgages, but I also think this strategy carries some risks. If Lloyds’ property arm fails to deliver a good service, it could damage the bank’s wider reputation with consumers.
Lloyds share price: buy, sell, or hold?
I have some concerns about Lloyds’ property ambitions, but I see this as a fairly safe investment overall.
Although profits are expected to dip next year, over time I expect Lloyds to make progress. In the meantime, I’d be happy to sit back and pocket the bank’s generous 5% dividend yield.
On balance, I think Lloyds share price will rise above 50p again at some point. With the shares trading below this level, I’d be happy to buy this stock for my portfolio.
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Roland Head has no position in any of the shares 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.
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