Lloyds (LSE: LLOY) shares have had a rocky few months. After a terrific couple of years for the share price – more than doubling even if you ignore all dividend payments – the rise has been checked somewhat. Investors can now buy the shares for around £1 a pop.
It’s my belief that some of the factors plaguing the stock so far this year are molehills rather than mountains. And there’s a possibility that the stock is undervalued by as much as 23%. Let’s take a look at why.
Problems
The newest problem for Lloyds and other FTSE 100 banks is a potential political shake-up. On 18 June, a by-election in Makerfield will bring a new MP into the Houses of Parliament and potentially a new Prime Minister too.
The possible consequence further down the line is a windfall tax on banks. The sector is seen as an easy and popular target for some politicians and it’s telling that banks have suffered multiple percentage drops on days where big election news was revealed.
Another big issue is the long-term consequences of the conflict in Iran. This is likely to push up inflation and will be very bad news for the UK and world economy if it isn’t resolved in the near future. Banks like Lloyds thrive in good economic conditions and struggle in bad ones.
All sounds pretty grim, doesn’t it? But there could be light at the end of the tunnel…
A buy?
For one, even if the worst comes to the worst with the above problems, these are largely short-term issues. They might put the brakes on the share price in the next year or two, but neither should have terrible implications for the health of the company.
And indeed, there is a very big ‘if’ in there. Analysts are very optimistic for the year ahead. The consensus target in the next 12 months is a 23% increase in share price with a 30% increase at the top end. This puts the bank as one of the shares with the most amount of optimism on the Footsie! That’s according to analysts, at least.
And all the while, shareholder returns are among the best that can be found on the FTSE 100. The forward dividend yield of 4.24% is above-average but only tells half the tale. If we include the £1.75bn of buybacks then total shareholder returns stand at a figure closer to 7%.
On the whole? It’s an eternal truth in the markets that political drama can produce some of the best bargains going. Will Lloyds turn out to be one of those undervalued shares when we look back in the years to come? Perhaps. I think it’s worth considering.
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John Fieldsend owns shares in Lloyds.
