Is it worth me buying Lloyds shares at around 70p after a 6% dip?

Lloyds (LSE: LLOY) shares are down 6% from their 6 March one-year high of 74p. This largely resulted from the market rout following the US tariffs announcement on 2 April.

As a former senior investment bank trader and longtime private investor, I always look for bargains following such shocks.

Experience has taught me that major stock markets always recover from these events over time.

So, could Lloyds be such a bargain and if so will I buy it?

How do the relative valuations look?

Lloyds trades at a price-to-earnings ratio of 10.8 against a competitor average of 8.3. These are Barclays at 7.5, HSBC at 8, NatWest at 8.8, and Standard Chartered at 8.9. So Lloyds is overvalued according to this measure.

The same is true of its 0.9 price-to-book ratio compared to its peers’ 0.8 average. And it is true again of its 2.4 price-to-sales ratio against its 2.3 competitors’ average.

This is not a good start from my perspective. I prefer to see some undervaluation in these measures from a stock I am considering buying.

What do future cash flows imply for the price?

That said, any share’s price is ultimately driven by its earnings over time. In Lloyds’ case, analysts forecast its earnings will grow by 13.5% a year to the end of 2027.

I ran a discounted cash flow (DCF) analysis to work out what this might mean for its share price.

This shows Lloyds shares are 53% undervalued at their present price of 70p.

Therefore, their fair value is £1.49, although market vagaries may move them lower or higher than that.

This looks a lot more positive to me than Lloyds’ relative valuations implied.

Where am I in the investment cycle?

These numbers can never tell the whole story of a stock, of course. It is vital to look at the risks involved in each one and how they impact each investor’s risk-reward criteria.

A large part of this will be based on where they are in their investment cycle. This I see typically as being around a 30-to-40-year duration.

The earlier an investor is in their investment cycle, the more time stocks have to recover from any market shocks. Generally, the younger an investor is when they start this process, the more risk they can afford to take.

I am over 50 now and in the later part of my investment cycle. Therefore, I can take fewer risks than I did when I was younger.

How do the risks stack up?

One risk to Lloyds is a further narrowing of its net interest income if UK interest rates keep falling. This is the difference in interest received from loans and paid on deposits.

Another is the as-yet unquantified liability for mis-selling vehicle insurance. It has put aside £1.2bn to cover this, but it could be much more.

A further risk is a global recession arising from US tariffs, which could hit Lloyds’s business and personal clients.

Moreover, the effect of any of these risks coming true would be magnified in its sub-£1 share price. After all, every penny here represents 1.4% of the stock’s entire value!

For me, the risks are just too high for me to take, so it is not worth me buying the stock.

The post Is it worth me buying Lloyds shares at around 70p after a 6% dip? appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of Motley Fool Money. Simon Watkins has positions in HSBC Holdings and NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. 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.