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Since June, my wife and I have been on a buying binge, eagerly purchasing cheap shares in quality companies. One of the first cheap stocks we bought was Lloyds Banking Group (LSE: LLOY). As I write, the Lloyds share price stands at 45.54p. To me, that’s far too low. That’s why we won’t sell our shares at anywhere near current levels.
The share price slumps
My wife bought Lloyds shares at an all-in price of just below 43.5p in June. At its 52-week high on 17 January, the price peaked at 56p. Since then, it’s been pretty much downhill.
Shortly after Russia invaded Ukraine, the shares slumped to a low of 38.1p on 7 March. Here’s how they’ve performed (excluding cash dividends) over the short and medium term:
Over the past year, the Lloyds share price has lost under 9% of its value, but this is almost 12 percentage points below the FTSE 100’s positive 12-month return of 3%. Even worse, Lloyds shares have lost almost a third of their value in the last half-decade. Oops.
Lloyds is braced for a tough 2023
Economic storm clouds are gathering in the UK, Europe and the US. Consumer confidence is plummeting, hammered by soaring inflation, skyrocketing energy bills, and rising interest rates. It looks increasingly likely that we’ll enter a steep recession in 2023. All of these factors spell bad news for UK corporates, especially leading lenders like Lloyds.
However, thanks to its strongest-ever balance sheet, the Black Horse bank looks well-placed to ride out next year’s storms. For example, while cash deposits are rising at the bank, so too are interest rates. And rising interest rates boost banks’ net interest margins, making Lloyds & co more profitable.
On the other hand, it’s abundantly clear that bad debts and loan losses will rise in 2022-23. In fact, Nationwide warned the market about this trend just last week. Thus, I’m expecting much larger loan-loss provisions from Lloyds next year.
To me, Lloyds shares look undervalued
I see Lloyds shares as fundamentally undervalued. In troubled times, I expect huge, fortress-like banks with strong capital reserves to outperform smaller rivals. For Lloyds, I think big could finally become beautiful.
To me, the share price fails to reflect this FTSE 100 firm’s underlying worth. Lloyds is currently valued at just £30.6bn, yet has 26m customers. What’s more, its trailing price-to-earnings ratio of 7.5 equates to a bumper earnings yield of 13.3%. And the trailing dividend yield of 4.7% a year is covered a hefty 2.8 times by income. To me, this suggests that these cash payouts could rise over time.
Summing up, Lloyds faces tougher times over the next 12 to 18 months. But I expect it to emerge a winner in 2024 onwards. And that’s why we wouldn’t consider selling our shares with the Lloyds share price below, say, £1. If we ever sell at all, that is!