Should I buy Lloyds shares while they’re still under £1?

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Lloyds Banking Group (LSE: LLOY) has started picking up a bit since releasing first-half results in July. At just 45.4p as I write though, there doesn’t seem to be any pressing need to buy Lloyds shares before they reach £1.

But can Lloyds actually break though that 100p barrier? And what would it make the valuation look like?

Right now, Lloyds is repurchasing its own shares as part of a share buyback of up to £2bn. By interim time, it had reached £1.3bn.

The reduction in outstanding shares should boost earnings and dividends per share in the future. And I always like it when a company sees its own shares as good value and returns capital that way.

Strong progress

The half saw increases to revenue, underlying profit, and net interest income. Rising interest rates hurt borrowers, but they’re good for lenders like Lloyds.

After a “strong financial performance in the first half of 2022,” Lloyds lifted its full-year guidance. And that’s in the face of current macroeconomic assumptions.

What do forecasts say about the full year?

The second six months of the year could be traumatic. I think it’s always wise to treat forecasts with caution, but even more in the current climate.

Well-covered dividend

Right now, the City’s analysts put Lloyds shares on a low forward price-to-earnings (P/E) ratio of 6.7. Forecasts suggest a dividend yield of 5.1%, and climbing.

The 2022 dividend would be covered around 2.8 times by forecast earnings. And that’s one of the highest coverage ratios of all the top FTSE 100 dividend payers right now. Interestingly, it’s beaten by Barclays at more than three times. Barclays also published a strong first-half report in July, lifting its dividend and announcing a new share buyback.

So far, at the halfway stage, Lloyds has raised its dividend by 20%. And the forecast level of dividend cover gives me confidence in the bank’s ability to lift its payouts progressively in the coming years.

There’s a decent safety margin there. And I think, in the current economy, it’s wise to retain that and not try to raise dividends too fast. Banks have tried to get back to big dividends in the past, too quickly in my view. And I think that damaged long-term sentiment.

New valuation?

What would a share price of £1 do for Lloyds’ valuation metrics? On 2022 forecasts, it would push the P/E to a bit over 14.5. And it would drop the dividend yield to 2.3%. But the forecast 2024 dividend would yield a reasonably respectable 3%.

That P/E would be around the FTSE 100’s long-term average, so not outrageous by any means. With current conditions though, I’d be surprised to see any bank exceed a P/E of 10 in the next couple of years.

And buying into an out-of-favour sector, especially against a background of spiralling living costs, is clearly risky.

So, I don’t really expect Lloyds shares to reach £1 any time soon. But I do think they’re still too cheap. Lloyds is on my buy list as a top-up candidate for my next investment.

The post Should I buy Lloyds shares while they’re still under £1? appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and 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.