With Lloyds (LSE: LLOY) shares having risen, I wanted to find out whether there is any value left in them. And the first part of my price evaluation was to compare Lloyds’ key valuations with its peers.
The ‘Big Four’ UK bank trades at 8.3 on the price-to-earnings ratio bang in line with the 8.3 average of its competitors, but higher than three of them. These comprise NatWest at 7.7, Standard Chartered at 7.9, HSBC at 8, and Barclays skewing the number at 9.8.
So, Lloyds looks slightly overvalued on this basis.
It appears fairly valued on the 0.8 price-to-book ratio – the same as its competitors’ average.
And it seems slightly undervalued on a price-to-sales ratio of 2, against a peer average of 2.3.
Now for an assessment accounting for future cash flow forecasts. This is the acid test in my experience as a former investment banker and private investor for 35 years.
A discounted cash flow analysis shows Lloyds shares are still 53% undervalued. This is despite their sizeable price rise from their 13 February 12-month traded low of 41p.
Therefore, a fair value is technically £1.30, although they may go higher, or never reach that level.
Does the business support a bullish view?
I think a principal risk for Lloyds is declining UK interest rates if inflation continues to fall. This could dent its net interest income (NII), which is the difference between interest received on loans and paid on deposits.
Indeed, over the first nine months of 2024, underlying NII fell 8% year on year to £9.6bn. Underlying profit declined 12% to £5.4bn.
Q3 2024 was a little better, with underlying NII falling 6% and underlying profit dropping 8%.
That said, Lloyds showed a statutory profit before tax of £1.823bn. This outstripped market expectations of £1.6bn, although it was 2% lower than Q3 2023.
Will I buy?
It is crucial in stock picking to appreciate where one is in the investment cycle, in my experience.
Basically, the younger an investor is, the more time a chosen share has to recover from any pricing shocks. Consequently, younger investors can afford to take greater risks on a stock than older ones.
I am aged over 50 now, which means two things for me. First, I have reduced my risk tolerance for new stocks and I have sold stocks that were at the higher end of the risk curve.
Second, I am focused on shares that generate a high dividend income. This should allow me to continue to reduce my weekly working commitments.
Lloyds shares are still priced under £1, which means every penny represents 1.6% of the stock’s entire value. This is way too high a pricing volatility risk for me to accept.
And on the dividend income front, the stock only pays 4.5%. This is way off the 7%+ annual return I demand from my high-yield picks.
Consequently, it is not worth me buying Lloyds shares right now.
That said, if I were younger I would consider them, based on their undervaluation and forecast rising dividends.
In this latter regard, analysts forecast Lloyds’ dividends will increase to 3.29p in 2025, 3.8p in 2026, and 4.76p in 2027. This would give respective yields on the current share price of 5.3%, 6.2%, and 7.7%.
This post was originally published on Motley Fool
