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Are Lloyds shares dirt-cheap or a nasty value trap?

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Lloyds Banking Group (LSE: LLOY) shares are among the most widely held and heavily traded in London. What’s more, many of the Black Horse group’s 58,000 employees own stock through the firm’s various employee share schemes. But Lloyds shares have had a tough 2022 so far — and the UK economy is set to weaken in 2023.

Lloyds shares slide

As I write on Wednesday afternoon, Lloyds shares trade at 41.78p, valuing it at £28.1bn. This makes the bank the 17th-largest member of the FTSE 100 index. To me, this sounds like a modest valuation for a bank servicing 26m customers across 14 famous financial brands.

However, the Lloyds share price has drifted downwards over the past year, as the following table shows:

One day -1.0%
Five days 0.7%
One month 0.0%
Six months -9.5%
2022 YTD -12.4%
One year -18.1%
Five years -38.0%

Lloyds shares have lost almost a fifth of their value in 12 months and nearly two-fifths over five years. In short, they’ve been a bit of a bust, both in the short and medium term.

Is Lloyds heading into a storm?

For the record, my wife bought Lloyds shares for our family portfolio in late June at an all-in price of 43.5p each. To date, we have incurred a paper loss of 3.9% of our investment, which we won’t lose sleep over.

That said, dark clouds are gathering for Lloyds and other large UK lenders. A toxic combo of soaring inflation, skyrocketing oil and gas prices, and rising interest rates make a UK recession in 2022-23 highly likely. And being the UK’s largest lender to businesses and consumers in the teeth of an economic downturn is far from ideal, agreed?

Is this stock too cheap today?

Perhaps the most brilliant professional trader in London I ever met once remarked to me, “The only action is price action. Nothing else matters”. This reminds me of a similar quote, this time from US mega-billionaire Warren Buffett, who quipped in 2008, “Price is what you pay; value is what you get”.

At its 52-week high, Lloyds stock hit 56p on 17 January and then fell to a 52-week low of 38.1p on 7 March, after Russia invaded Ukraine. Currently, it hovers around a tenth (9.7%) above 2022’s bottom and at the low end of its price range.

Currently, Lloyds shares trade on a price-to-earnings ratio of 6.9. This translates into an earnings yield of 14.5%, roughly twice the earnings yield of the wider FTSE 100. Meanwhile, this stock offers a dividend yield of 5.1% a year, one percentage point above the Footsie’s 4.1% yearly cash yield.

I like Lloyds shares

To me, this dividend looks safe as houses — despite the growing risk of a housing crash. After all, it’s covered 2.8 times by earnings, which is a solid margin of safety. And it’s this combination of high earnings yield and market-beating dividend yield that makes me think that Lloyds shares are cheap today.

Finally, I fully expect Lloyds to incur far larger loan losses and bad debts in 2023, because that’s what happens during prolonged recessions. But the bank’s balance sheet is in great shape, carrying billions of pounds of spare capital to mop up losses. Thus, I may buy more shares if the price falls much further!

The post Are Lloyds shares dirt-cheap or a nasty value trap? appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Lloyds Banking Group shares. 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.