Since reaching its 2023 peak in early February, Lloyds stocks have fallen by around 17%. They can not only be undervalued but also a value trap.
Shareholders of Lloyds Banking Group (LSE: LLOY) have not had the best year.
Lloyds stocks Decline
On February 9th, the share price of Lloyds reached its 52-week high of 54.33p. Unfortunately, a US banking crisis within a month sent financial equities tumbling globally.
Naturally, Lloyds stocks did the same, reaching a closing low of 44.17p on May 31. The stock is currently trading at 45.44p, up 0.7% from yesterday. Following is a breakdown of its deterioration over six different timescales:
| Five years | -28.5% |
| One year | -1.4% |
| Six months | -3.6% |
| Year to date | -4.6% |
| One month | -5.7% |
| Five days | -2.2% |
The value of Lloyds stocks has decreased over all time frames ranging from five days to five years. They have decreased by about three-tenths over the past five years. Lloyds has underperformed the FTSE 100 index over the same time period, which is down just 1.5%.
However, cash dividends, which have always been substantial at Lloyds (apart from the Covid-19 problem in 2020–21), are not included in these amounts. Thus, bringing back these dividends would significantly increase the aforementioned returns.
The stock seems undervalued
One thing to keep in mind is that UK banking equities typically trade at considerable discounts to the larger market. This is caused by a variety of factors, including the lasting effects on bank stock prices of the global financial crisis that occurred between 2007 and 2009.
However, Lloyds appears to be a desirable buy-and-hold investment. Currently, the business is only worth £29.2 billion, which is a low price for one of the Big Four UK banks.
The shares also have a paltry price-to-earnings ratio of 6.2 and a 16.1% earnings yield. That at least doubles the current earnings yield of the FTSE 100.
Additionally, the company offers value/income/dividend investors a 5.3% annual dividend yield that is supported by earnings three times over. We believe that the substantial margin of safety indicates a low likelihood that the cash distribution would be reduced in 2023. We do, in fact, anticipate higher dividends in 2023–2024.
It is challenging to run a large bank
Being one of the top lenders in the UK nowadays is difficult, on the other hand. Here in the UK, a cost-of-living crisis has been brought on by sky-high inflation. Additionally, the strain of rising energy costs has reduced household disposable incomes.
Additionally, rising interest rates have increased mortgage rates, making it harder to service home loans. House prices are thus dropping at their fastest rate in 14 years. So, in 2023–2024, we anticipate a rise in Lloyds’ loan losses and bad debts.
In conclusion, there are currently both advantages and negatives surrounding Lloyds stocks. Additionally, this stock has long been a value trap. We are now unable to purchase more Lloyds stocks due to a lack of cash, but we also will not be selling our current investment!
Do not overlook these excellent value stock selections
Investing in value stocks may offer a promising opportunity for long-term gains. We discuss two excellent options for expanding your assets.
Airtel Africa
A UK-based company called Airtel Africa (LSE: AAF) offers mobile money and telecommunications services in Africa.
We think that Airtel’s future growth prospects are very promising. The market for telecommunications adoption in Africa is expanding, and Airtel has so far made significant progress by increasing its market presence and investing in its infrastructure.
Airtel also has a recent track record of solid success. We are aware that past results do not guarantee future results. However, we can observe that throughout the last four years, revenue and gross profit have increased.
Next, the P/E ratio of just 8 on which Airtel shares are now traded suggests that the stock may be undervalued. Additionally, it now offers a dividend with a 3.5% yield. We are aware that dividend payments are not warranted and may be revoked at any time by the company.
From a pessimistic standpoint, Airtel operates in a geopolitically dangerous zone. Any political unrest or instability in Africa could have a negative impact on Airtel’s operations and shareholder profits.
JD Sport Fashion
In recent years, JD Sport Fashion (LSE: JD) has been the leader in the sportswear and streetwear industries. We recently added JD shares to our portfolio, but we still think it is a great bargain investment.
JD has a stellar track record of performance recently, similar to Airtel. For the previous four years, it has seen a growth in gross profit and revenue. JD presently offers a 0.5% dividend return, but we predict that over time, this will rise.
JD has expanded into other markets as well, launching sportswear lines under its own brand and building gyms under the JD Gyms name all around the UK. Our prediction is that these expansion strategies will keep the company’s performance and profits rising.
The price-to-earnings growth ratio for JD Sports is currently 0.8. A ratio lower than 1 is generally accepted to signify an undervalued stock. Additionally, we think JD has the size, market penetration, and market share to profit from the enormously lucrative athleisure fashion category. In fact, this sector is among the ones that are expanding the quickest globally.
JD’s profit margins could be stretched as a result of increased costs, which puts it at risk. Additionally, the present cost-of-living problem may cause buyers to switch from JD’s more expensive brands to fast fashion, which is a less expensive option.
Also read: Best Undervalued Stocks You Should Buy in UK