The Lloyds (LSE: LLOY) share price is down 14% from its 23 October 12-month traded high of 63p. This move lower followed the release of its Q3 2024 results that same day.
So, is this a golden opportunity to pick up some shares at a deeply discounted price?
Is the stock a bargain?
To establish whether it’s a bargain or not, I always start by looking at a firm’s key stock valuation measures relative to its competitors.
On the price-to-earnings ratio (P/E), Lloyds currently trades at 7.4 compared to an average of 8 for its main rivals. These comprise NatWest at 6.8, HSBC at 7.3, Barclays at 8.3, and Standard Chartered at 9.5.
So Lloyds is undervalued on this basis, although I cannot ignore that it is higher than two of those peers.
The same is true of its price-to-sales ratio. Here Lloyds presently trades at 1.8 against its competitors’ average of 2.
To translate these undervaluations into cash terms I ran a discounted cash flow (DCF) analysis. This shows Lloyds shares to be 56% underpriced at 54p.
Therefore, a fair value for the stock is £1.23, although it may go lower or higher than that and has not come close to that figure for over 15 years.
How does the core business look?
All firms’ share prices (and dividends) are powered by growth in earnings over time.
A key risk to Lloyds is a contraction in its net interest income (NII). This is the difference between the interest income it earns from lending activities and interest it pays to depositors. And it is likely to decline as rates fall in the UK.
Indeed, its NII dropped 8% over the first nine months of 2024 year on year.
That said, its Q3 results on 23 October showed a statutory profit before tax of £1.823bn. This was ahead of market expectations of £1.6bn, albeit 2% lower than Q3 2023.
As it stands, analysts forecast that Lloyds’ earnings will rise by 4.19% a year to the end of 2026.
Rising dividend forecasts
Analysts also expect its dividends to increase over that period.
Last year, it paid out 2.76p a share, yielding 5.1% on the current 54p share price. However, it raised this year’s interim dividend by 15% from 0.92p to 1.06p.
If the same action were applied to the total dividend then this year would see a payout of 3.17p. This would give a yield of 5.9% on the present share price.
Analysts expect total dividends of 3.25p in 2025 and 3.87p in 2026. These would generate respective returns of 6% and 7.2%.
Will I buy the stock?
Over a 7% yield and I start to become interested, as I focus on high-yielding stocks nowadays.
The big problem for me here is that Lloyds stock functions too much like a penny share for my liking. Although technically it is not one – its capitalisation is too big – each penny represents nearly 2% of its entire value! I am not sure my blood pressure could withstand the volatility swings. So it is not an unmissable opportunity for me.
However, if I were younger, I would add it to my portfolio for its earnings growth prospects. These are likely to drive its share price and dividend higher over time.
This post was originally published on Motley Fool
