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For ages, I’ve been trying to get my head round the reasons Lloyds Banking Group (LSE: LLOY) shares are so cheap.
I mean, at 41p at the time of writing, we’re looking at a five-year fall of 28%. And that’s when the valuation looks super low, and forecasts are the best they’ve been in years.
Reasons to be cheerful
I’m not saying this just because I bought Lloyds shares years ago and I’m still sitting on a loss. No, I really see things that suggest the share price should be a lot higher.
I bought Lloyds shares for dividends. And though the share price is down, I’ve had a good passive income stream from them.
The dividend was cut in the pandemic, along with the rest of the banks. But that was only because the regulators insisted. As it turned out, Lloyds’ liquidity wasn’t under threat, and it could have carried on paying.
For the 2022 year, Lloyds delivered a 5.3% dividend yield. Isn’t that worth more than a price-to-earnings (P/E) ratio of six? I think so.
More bargains ahead
The folks in the City even think the Lloyds P/E will drop as low as five by 2025. At least, that’s if the share price doesn’t rise by then.
And, you know, I really hope it doesn’t.
Remember billionaire investor Warren Buffett, when he spoke about people who plan to eat burgers for the rest of their lives? They should be happy when beef prices fall, right?
Well, I want to keep adding to my Lloyds shareholding, to build up the best passive income pot I can. And I’d love to still be able to buy them at a P/E of five, with a forecast dividend yield of 8%, in 2025.
A cracking year
What have the banks ever done for us?
Well, apart from providing the financial system that every element of our lives depends on. Oh, and all the financial services needed by those thousands of companies that make up the economy.
Doesn’t that make banks the best example of a picks and shovels investment there is? In the gold rush, whoever provided the picks and shovels made their money, no matter who found the gold.
The financial sector also looks like being among the strongest in the FTSE 100 this year.
Forecasts suggest financials could account for more than 50% of all pre-tax profit growth in 2023. And that’s a sector that includes Barclays, on a forecast P/E of less than five today.
Tunnel with no end?
Everyone seems stuck on inflation figures, and house price falls. UK house prices have seen their biggest annual fall since 2009.
Lloyds is a mortgage lender, and that will probably hurt.
So what will happen to the Lloyds share price now? Well, I fully expect I’ll continue to be wrong about it. And that sentiment will keep it down for a long time yet.
And I do actually hope I am wrong, and I can keep on bagging top dividend yields for my long-term passive income plan.
