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Highlights:
Lloyds’ share price has declined 14% since reaching a 12-month high on 23 October 2024, following the release of its Q3 results.
The stock currently appears undervalued compared to key competitors, with a lower price-to-earnings and price-to-sales ratio.
Analysts foresee modest earnings growth and rising dividends, with an estimated yield of up to 7.2% by 2026.
Lloyds Banking Group (LSE:LLOY) has seen its share price decline 14% from a 12-month high of 63p on 23 October 2024, following the release of its third-quarter results for the year. The question arises whether this drop presents an opportunity for shareholders to acquire the stock at a discounted price.
In terms of valuation, Lloyds appears to be trading below its peers. The bank's price-to-earnings (P/E) ratio stands at 7.4, which is slightly lower than the industry average of 8. Other major players, such as NatWest (6.8), HSBC (7.3), and Barclays (8.3), have comparable or slightly lower P/E ratios. Similarly, Lloyds’ price-to-sales (P/S) ratio of 1.8 is lower than the average of 2 for its competitors. A discounted cash flow (DCF) analysis suggests that the current share price of 54p could be undervalued by approximately 56%, with a fair value estimated at £1.23, although this has not been reached for over 15 years.
Despite the relatively low valuations, Lloyds faces headwinds in its core business, particularly from a potential decline in net interest income (NII) as UK interest rates decrease. The bank reported an 8% drop in NII for the first nine months of 2024. However, the company’s Q3 statutory profit before tax of £1.823bn exceeded market expectations and demonstrates its ability to deliver results in challenging conditions.
Looking forward, analysts forecast modest earnings growth of 4.19% annually through 2026. Dividends are also projected to rise, with a 15% increase in the interim dividend this year. The total dividend for 2024 is expected to reach 3.17p, providing a yield of 5.9% at the current price. Further increases are anticipated in 2025 and 2026, with yields potentially reaching 7.2%.
While the dividend yield is attractive, the stock's volatility, given its low share price and large price swings, may be a concern for those seeking stability in their holdings. The stock’s low price relative to its market value has resulted in a more speculative, penny stock-like behavior, which may deter some shareholders despite the relatively high dividend prospects.
