Does the 5% dividend make Lloyds share price too cheap?

on Apr 8, 2022
  • Lloyds share price has been stuck in a tight range recently.
  • Lloyds Bank is an undervalued bank with a strong dividend.
  • It could perform well as the Bank of England hikes rates.

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The Lloyds (LON: LLOY) share price has moved sideways in the past few days as investors focus on the UK economy and the relatively hawkish Bank of England (BOE). The stock is trading at 45p, which is about 22% below the highest level this year.

Lloyds Bank turnaround

Lloyds is the largest bank in the United Kingdom. The bank operates through its eponymous brand and other names as well. Its subsidiaries are Halifax, Bank of Scotland, and Scottish Widows among others.

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The bank has been in a turnaround strategy after it was bailed out by the government during the 2008/9 financial crisis. 

Like other UK banks, however, this turnaround has been affected by several external factors like Brexit and the Covid-19 pandemic. Still, the company managed to emerge relatively unscathed from the pandemic.

The current phase of the turnaround is being led by Charlie Nunn, a former wealth manager at HSBC. The process involves shutting down most of its underperforming branches, investing in the property market, and investing its wealth management solutions.

There are several reasons why analysts believe that Lloyds is a good investment. First, as the biggest bank in the UK, it is set to benefit by the ongoing tightening by the Bank of England. The bank has already made three rate hikes and this trend will continue. A simple 25 basis point rate increase leads to substantial returns by the company.

Second, Lloyds has benefited from the ongoing vibrancy of the real estate industry. Data published by Halifax and Nationwide showed that UK home prices have jumped to record highs. According to Lloyds, it holds about 307 million pounds of UK mortgages, meaning that it will continue benefiting.

Most importantly, Lloyds has a strong balance sheet and has no exposure to the slowing investment banking division. Further, it is an undervalued company trading at just 0.8x P/TBV. It also has a dividend yield of about 4.35%, which is a good one.

Lloyds share price forecast

Lloyds share price

The LLOY share price has been under pressure lately. The stock remains slightly below the lower side of the ascending channel. It has also moved slightly below the 25-day moving average while the Money Flow Index (MFI) has moved from the overbought level of 80 to about 40. 

Therefore, in the near term, the stock will likely remain in this range. It will then bounce back although the risk of a property market meltdown is possible.