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Despite being one of the main banks in the country, the shares of Lloyd's (LSE: LLOY) sells for pennies. Is Lloyds' share price unlikely to be cheap or is this a potential value trap?
Past performance is not a guide to what will happen in the future. But I think I understand as The fact that the stock price has gotten to where it is today may help me think about some pros and cons that buying stocks can offer my portfolio.
The 10 year vision
In the last decade, the share price has almost halved. Oh!
What's behind the 49% drop?
On the one hand, Lloyds has maintained many strengths over the last decade that I think could bode well for its future performance. These include a suite of well-known brands, a market-leading mortgage position and a broad customer base.
But a decade ago, we were firmly emerging from the economic crisis. Conversely, the current uncertain economic outlook could lead to higher loan defaults and hurt earnings.
The bank's impairment charge for the first three quarters of its current financial year (£800m) was actually lower than the previous year period. But the perceived risk of further defaults is weighing on Lloyds' share price.
The five year vision
In the last five years, the share price has also fallen: 27%.
One of the reasons for the decline was the pandemic and its impact on business performance. He revealed a risk that I believe remains relevant for the future: a sudden and unexpected public health event that suddenly disrupts the normal money flows that banking depends on.
But I think that drop also reflects Lloyds' slow restoration of its pre-pandemic dividend.
Despite an after-tax profit of £5.6bn last year, the dividend has yet to reach its 2018 level. Rivals' share prices have fallen over the past five years, but by much less. Barclays has dropped 5%, Natwest 13% and the HSBC The share price is down 4%.
As a Lloyds shareholder for part of this period, my interpretation was that the board does not sufficiently value the importance of the dividend to shareholders.
Yes, the current yield of 5.9% is high. But I see the risk of another cut in the future if the economy deteriorates again. Lloyds' dividend remains much lower than before the 2008 financial crisis.
One year's vision
Over the past year, a 19% rise in price means anyone who owns Lloyds shares has effectively seen the value of their holding drop by almost a fifth.
A key reason has been the weakness of the economy and housing market, raising the prospect of lower customer demand and higher mortgage defaults. I still see those risks. However, things may have gotten worse and falling interest rates in the future may help the black bank business.
If so, the current P/E ratio of 8 could be a bargain. The bank also trades at a low price-to-book ratio of around 0.6.
For now, however, I will wait to see if the economic risks diminish before thinking about investing.
