Lloyds’ (LSE: LLOY) share price has experienced a sharp fall in the last week or so. On 24 October, the stock ended the day at 62.2p. Today (1 November) however, it’s sitting at 53.4p – roughly 14% lower.
Is there value on offer after this sharp drop? Let’s take a look.
Cheap at first glance
At first glance, the shares do look cheap today.
Currently, City analysts are expecting Lloyds to generate earnings per share of 6.7p this year.
So, at today’s share price of 53.4p, the price-to-earnings (P/E) ratio is just eight, which is miles below the market average.
Unfortunately though, things are not that simple.
You see, the reason the shares have fallen over the last week is that there’s quite a bit of uncertainty in relation to the Financial Conduct Authority (FCA) investigation into motor finance mis-selling.
This may result in substantial fines for a handful of banks including Lloyds.
Now, Lloyds has already put aside £450m for this. But experts believe the fines could be significantly greater than this.
Analysts at RBC, for example, have said that Lloyds could be looking at a bill of £2.5bn (and a £3.9bn bill in the worst-case scenario).
So, the bank’s profits could be about to take a big hit. And if profits were to come in much lower than expected, the shares may not look so cheap.
Can the dividend yield be trusted?
It’s a similar story with the stock’s dividend yield.
After the recent share price fall, the yield here has risen to 6.1%, as analysts are currently forecasting a payout of 3.3p for 2024.
However, if Lloyds was to face a huge bill from the motor finance issue, the dividend payout could be much lower than anticipated.
After all, dividends are never guaranteed. And Lloyds has a history of slashing its payout.
So, I’d take the dividend forecast with a grain of salt. Investors who have invested in the company for income could be disappointed.
Better stocks to buy?
Given the uncertainty here, it’s hard to know if there’s value on offer right now.
There’s definitely a chance that today’s share price could end up looking like a bargain in a few years’ time. We could even see a small bounce in the near term.
On the other hand, there’s a chance that the shares could go nowhere for a few years. They could even continue to go lower.
Personally, I don’t see the risk/reward proposition as very attractive today. For me, there’s not enough potential for big gains.
There are a lot of stocks that I’m bullish on though given the pace of technological innovation today. In the years ahead, I expect plenty of UK and US stocks to double, triple, or more.
These are the stocks I’m going to be buying for my own investment portfolio in the months ahead.
This post was originally published on Motley Fool
