Are Lloyds Banking Group plc shares worth less than 50p?

Lloyds Bank sign

Ben Graham, the father of value investing, once said: "In the short run, the market is a voting machine but in the long run, it is a weighing machine".

What this means is that sentiment can move a company's share price in the short term but sooner or later the market will price the business based on its fundamental value. If we invest when sentiment has pushed the shares down below fundamental value, we'll do well in the long run.

Today, I'm looking at where Lloyds(LSE: LLOY) currently stands in terms of sentiment and fundamental value. Will investors do well in the long run?


Over the last two years, shares of Lloyds have traded as high as 89p and as low as 48p and are changing hands at 63p today.

The low of 48p came in the wake of last summer's EU referendum. Ahead of the poll, there were warnings from the government, Bank of England and most FTSE 100 companies that a 'no' vote would have all manner of adverse consequences for the country, including lower economic growth and possibly a recession.

However, the economy is performing much better than the worst-case predictions. The Footsie has recovered from the post-referendum sell-off and Lloyds' shares have climbed from their low of 48p. Was this a case of the market voting in the short run? Or is the fundamental value of the bank really less than 50p?


Lloyds' tangible net asset value (TNAV) currently stands at 54.8p, so if the shares were to trade at 48p today, they'd be on a P/TNAV of 0.88. Put another way, you'd be able to buy £1 of Lloyds' assets for 88p.

As well as looking fundamentally undervalued on assets, the bank would also look incredibly cheap based on its current-year forecast earnings and dividend. The forward price-to-earnings (P/E) ratio would be a bargain-basement 6.9 and the prospective dividend yield would be a whopping 7.5%.

Of course, you can't buy Lloyds' shares for 48p today. But are they still fundamentally undervalued at 63p?

Looking to the future

At today's price, Lloyds' P/TNAV is 1.15, the forward P/E is 9.1 and the prospective dividend yield is 5.7%.

Lloyds is nearing the end of its long recovery from the financial crisis and the government's remaining bailout stake in the bank is down to below 2%. The Black Horse has a strong balance sheet and has passed stress tests for a range of adverse economic events with flying colours. It has a market-leading cost-to-income ratio, which means it's a highly efficient bank.

By 2019, it expects to be making a return on equity of between 13.5% and 15%. I see this as a sustainable long-term rate of return and regard a P/TNAV of 1.5 as a fair valuation. That would imply a share price of 95p, giving a P/E of 13.7 and a dividend yield 3.8%. As such, I think the shares are very buyable at 63p.

Of course, the price could be volatile as Brexit negotiations unfold and the UK economy could also go through a period of depressed activity, if business investment and consumer spending become overly cautious. However, I would view any negative 'voting' by the market in the short term simply as a good opportunity to buy more shares for the long run.

Are you worried about Brexit?

Brexit is currently one of the market's major preoccupations. And there's no denying that there are potential implications for different industries and companies.

To help Britain invest better during this uncertain time, the experts at The Motley Fool have compiled a FREE guide called Brexit: Your 5-Step Investor's Survival Guide.

This guide is essential reading on the risks and opportunities of Brexit for investors, and could make a real difference to your portfolio returns in the coming years. Simply click here for your copy, it's completely free and comes without any obligation.

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

10 things your bank doesn't want you to know
See Gallery
10 things your bank doesn't want you to know
Once you have opened a current account with a bank or other lender, you will get a steady flow of emails, letters (and maybe phone calls) offering you a savings account, loan, mortgage, ISA etc to go with it. But while it may be tempting to have everything in one place, it's better to do the legwork and shop around for the best financial products. You can compare interest rates on loans and savings accounts in the 'best buy' tables in the newspapers, or look online on comparison sites. Remember you can still easily transfer your money between accounts, even if they are not with the same financial institution. 
Whether you want to apply for a new mortgage or refinance an existing one, your bank will probably be very happy to give you an instant quote in the hope that you will go with them. They may not tell you that you can shop around at other lenders. A mortgage broker can give you an overview of the best interest rates on offer, and might be able to cut you an even better deal him/herself. 

Want to cash in your jars of change that are sitting on your shelves at home? Many banks are not very keen on coins. They often only take it from their own customers. You will have to sort it into different denominations and put the coins in the bank's bags in set amounts (for example, £1 for coppers, £5 for silver, etc). Some banks only take a limited number of bags a day, or won't take any at busy times. Others take a different view: HSBC has free coin deposit machines in many larger branches where you pour your jar of coins into the machine and it counts them and automatically credits your account. Barclays, NatWest and RBS also have machines in large branches in city centres.

Bank employees now have a duty to point out that they only advise on the bank's products and don't offer independent financial advice. What they won't tell you is that even the advice they give you about the bank's own products should be treated cautiously. Bank staff are often undertrained, underpaid and overworked. (You could ask for the employee's qualifications before getting advice.) So do your own research and/or find an independent financial adviser.

Nothing is set in stone. Your bank won't tell you this, but sometimes it will waive a fee, for example an overdraft or an ATM fee, depending on the circumstances. You have nothing to lose by asking, if you can argue persuasively why they should waive the fee. Citizens Advice says your bank should treat you sympathetically if you can show financial hardship.

As stated in the previous slide, some things are negotiable – such as interest rates or waiving fees – if you can make a good case for it. In that instance, talking to an employee in person is better than filling in a form online.

If your account is overdrawn and you get paid, your bank could use this money to pay off your overdraft without your permission. However, you have a right to ask them not to do this so you can pay your rent or mortgage first. This is called first right of appropriation. You have to ask your bank in writing, and you'll need to write to them with new instructions every time money gets paid into your account. Make sure you write 'first right of appropriation' in your letter.

If money is mistakenly credited to your account, your bank or building society can recover the money, assuming they do this within a reasonable time. But you may be allowed to keep the money, for example if you didn't realise the bank had made a mistake and spent the money in good faith. You would have to prove that you spent it in such a way that it would be unfair to ask you to pay it back. You can complain to the Financial Ombudsman if you think your lender is being unfair in asking you to repay the money.

If you do have to pay it back, you could try to reach an agreement with your bank to pay it back in instalments without interest being added.

The Financial Ombudsman Service has more advice on what happens when payments have been credited to the wrong account. If you did something wrong - for example, by entering the wrong account number - rather than the bank, the Financial Ombudsman may still uphold your complaint. They consider whether the financial institution made it clear to the consumer that only the bank sort code and account number are used to process the payment, rather than the name of the payee. They will also ask whether the lender should have realised that the consumer had made mistake, and once the problem came to light, did the firm take reasonable steps to try to get the money back from the recipient.

If too much is deducted from your account, your lender may have to refund the full amount of the payment. For example, if the money is taken through a direct debit or credit card payment for a hotel room or car rental. When deciding whether the debit was reasonable, the bank or building society will take into account your previous spending pattern. But the bank doesn't have to refund the payment if you agreed the amount beforehand or were informed of the payment by your lender at least four weeks before.

If you don't have enough money in your account to cover a direct debit payment, your bank may not make the payment. It doesn't have to tell you that the payment hasn't been made, so the onus is on you to keep checking your account. If, on the other hand, the payment goes through, you may be charged for an unauthorised overdraft.


Read Full Story