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Lloyds Bank Cluster(LSE:LLOY) is one of the most popular dividend stocks on the London stock market.
I think the banking company attracts investors because of its low valuation and high dividend yield. However, in the last four months, the share price has increased by more than 30%.
However, with shares now close to 55p, the valuation still looks low compared to the broader market. FTSE 100 Index index.
Dividend is expected to increase
City analysts who follow the company expect earnings to rebound by almost 17% in 2025 after falling by a similar amount this year. But the all-important dividend looks set to grow both this year and next.
Compared to those expectations, the forward price-to-earnings (P/E) ratio is just above seven and the forward dividend yield is just over 6%.
Meanwhile, Footsie's forward earnings multiple is around 13.5 and the expected return is around 3.5%.
At first glance, Lloyds still looks cheap. And other indicators reinforce the idea that it is a good investment, such as the price-to-tangible-book ratio, which is close to 0.89. A reading of 1 would mean that the share price matches the value of the underlying assets. Therefore, Lloyds is priced at a discount to investors at the moment.
But is the company actually one of the best dividend stocks to buy right now? Well, there are a few factors to consider that may indicate that Lloyds is not as cheap as it seems.
One of the main reasons is the volatility that is often observed in the value of the company's assets. In the case of banks, assets include the reserves of financial instruments they hold and the money that others owe the company due to loans it has granted.
However, in difficult economic times, financial instruments can lose value and distressed individuals and companies may default on their debts.
The worst possible scenario?
I remember the uncertainty surrounding banks after the credit and financial crisis of the 2000s. No one seemed able to accurately determine the real value of banks' assets.
In such a situation, the only logical thing the stock market could do is to lower share prices well below the last known values of the banking companies' assets. That is what happened at the time, and bank stocks plummeted by more than 90% in some cases.
But what happens now that economies are doing pretty well? It makes sense for the market to keep Lloyds and other banks' valuations low. After all, we never know for sure when the next economic crisis will come.
So for me, high dividend yields, low P/E ratings and discounts to tangible net asset value are likely to be a permanent feature. However, all that may disappear if we ever see another raging, bubble-like bull market. Bank stocks have risen before, and Lloyds may continue to rise now. After all, forecasters expect profits to rise next year.
However, owning Lloyds shares carries undeniable cyclical risks. That's why, for me, it's not one of the best dividend stocks to buy now and I would look elsewhere for dividend opportunities.
