The Lloyds (LSE:LLOY) share price has been a real winner for investors in the UK banking sector, surging 37% over the past year.
This performance has outpaced both the broader UK market, which returned 10.7%, and other UK banks, with an average of 17.5%. With such strong momentum, investors might be wondering if Lloyds deserves a spot on their watchlist. Let’s dive into the details.
A banking giant
Founded in 1695, Lloyds has stood the test of time, evolving into one of the UK’s largest financial institutions. The group offers a wide range of banking and financial services across three main segments: Retail, Commercial Banking, and Insurance, Pensions and Investments.
This giant of the market boasts a market capitalisation of £36.3bn. However, it trades at a price-to-earnings (P/E) ratio of just 8.1 times. This relatively low P/E suggests the stock might be undervalued compared to its earnings potential.
Additionally, the price-to-book (P/B) ratio of just 0.8 times indicates that the market values the firm at less than its book value, potentially representing a bargain for value investors. Of course, these are just two metrics, but they definitely have me interested.
Growing strength
Lloyds’ financial health appears robust, with earnings growing by 18.8% over the past year. The company reported earnings of £4.49bn on revenues of £18.18bn, demonstrating a very healthy net profit margin of 24.71%. Furthermore, analysts forecast earnings to grow at a steady pace of 4.85% per year, suggesting continued profitability.
For income-focused investors, the bank offers a tempting proposition with its current dividend yield of 4.7%. The pay-out ratio stands at 39%, indicating that the dividend is well-covered by earnings and potentially sustainable. So far, this one is ticking all the boxes for steady growth. And management’s planning for the future.
Areas of concern
While the balance sheet and recent performance paint a fairly attractive picture, I feel like potential investors should be aware of some risks. The banking sector’s highly sensitive to economic conditions and interest rate fluctuations. Additionally, Lloyds’ high debt-to-equity ratio of 317.9% suggests a significant level of leverage, which could become problematic in a downturn. With the shares having such a healthy run, and political uncertainty still lingering, I wouldn’t be surprised to see some bumps in the road ahead.
According to a discounted cash flow (DCF) analysis, the company’s undervalued by about 10%. Of course, this is nothing to be sniffed at. But I’d worry if I was to invest now, the best of the growth is already behind me. Many investors may be looking to take profits soon, and put money to work elsewhere.
One for my watchlist
The company’s market-beating returns, coupled with its dividend yield and growth prospects, could appeal to both value and income investors. However, with the banking sector’s cyclical nature and high debt levels, I think that there might be more lucrative investments out there.
I’ll be keeping Lloyds on my watchlist for now though.
This post was originally published on Motley Fool
