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Having fallen steadily since early February, the Lloyds Banking Group (LSE:LLOY) share price now offers exceptional value for money. At least it does according to the City’s profits and dividend forecasts.
At 42.1p per share, Lloyds shares trade on a forward price-to-earnings (P/E) ratio of 5.5 times for 2023. This is well below the FTSE 100 average of 14 times, and built on broker expectations that annual earnings will rise 4%.
There’s also a huge difference between the dividend yields of the Footsie and what the Black Horse Bank offers. At 6.6%, this sails above the 3.8% average for London’s blue-chip shares.
The bank doesn’t just look cheap based on this year’s projections. In fact Lloyds shares offer steadily improving value for money based on City forecasts through to 2025.
| Year | Earnings growth forecast | P/E ratio | Dividend yield |
| 2024 | 2% | 5.4 times | 7.4% |
| 2025 | 12% | 4.8 times | 8.3% |
So are Lloyds shares now a no-brainer buy?
Reasons to buy
The bank is certainly very popular with users of some of the UK’s biggest investing platforms.
Lloyds shares were the fifth most-popular buy via Hargreaves Lansdown’s investment platform in the last seven days. And it was the 12th most-purchased stock among AJ Bell customers.
Purchasing cyclical shares like banks can be a risky business in tough economic times like now. But there are several good reasons why many investors still love to invest in Lloyds. These include:
- Brand strength. As one of the UK’s oldest banks (it dates back to 1765), people trust it to look after their money more than they do many other financial institutions.
- Robust product range. Products like current accounts, mortgages, credit cards and general insurance remain in high demand even during ecoomic downturns.
- Huge digital presence. It’s the Uk’s largest online bank with 20.6m digitally active users.
- Strong balance sheet. Lloyds is one of the best-capitalised banks with a CET1 capital ratio of 14.2% as of June.
Why I’m avoiding it
This is all great news, of course. So why haven’t I bought Lloyds shares?
It’s my opinion that current City forecasts are in danger of being blown widely off course. As the UK economy toils, demand for loans is beginning to buckle. Meanwhile, the level of bad loans on Lloyds’ books continues to soar (these hit £662m in the first half).
Unfortunately the group doesn’t have exposure to overseas markets to offset weakness at home. And major structural problems (including labour shortages, trade issues and falling productivity) mean Britain could be in for a prolonged period of economic weakness, putting broker estimates beyond 2023 in peril.
Costs also continue to creep up each year, putting extra strain on earnings. It’s expecting operating costs to rise another 3% (to £9.1bn) in 2023. But recent performances suggest the actual total could exceed this target.
And despite the company’s huge investment in digital, it faces increasing pressure to stop digital-led and challenger banks taking its customers. Lloyds shares might be cheap, but I’d still rather buy other low-cost FTSE 100 shares today.
