As Lloyds shares creep again above guide worth, have I missed my likelihood to purchase?

Like getting sufficient sleep, avoiding social media, and constructing self-driving automobiles, shopping for shares beneath their intrinsic worth is simpler mentioned than performed. But it surely doesn’t need to be unattainable.

For instance, shares in Lloyds Banking Group (LSE:LLOY) have climbed 50% over the past yr and now commerce above the guide worth of the underlying enterprise. So is the inventory nonetheless low-cost?

A outcomes enterprise

The Lloyds share worth acquired a lift on Thursday (20 February) when the financial institution launched its newest outcomes. Income might need been down, however buyers have been impressed with the broader information.

Pre-tax earnings fell 19% within the final three months of 2024. However this was partly because of the financial institution setting apart £700m for potential motor mortgage liabilities.

On the constructive aspect, lending margins expanded barely in the course of the quarter and Lloyds introduced a dividend of two.11p. By itself, that’s simply over 3% of the present share worth. The financial institution additionally introduced plans to spend £1.7bn on buybacks – sufficient to cut back the share depend by 4.25% at present ranges.

All of this meant the inventory went up over 5% in a day.

E book worth

In doing so, Lloyds shares began buying and selling at a price-to-book (P/B) ratio above 1. That’s the primary time this has occurred since 2019. 

When a inventory trades beneath the guide worth – the distinction between property and liabilities – of the underlying enterprise, buyers have a margin of security. At the least, they do in concept. 

On paper, an organization whose shares commerce beneath guide worth may dump its property, pay down its money owed, and provides buyers greater than the share worth in money. That will be a very good end result.

Realistically, with a financial institution like Lloyds, this has all the time been unlikely. However with a rising share worth which means even that theoretical margin of security has gone, is the inventory now an enormous threat? 

Dangers

The large uncertainty with Lloyds shares in the mean time is the continued investigation into motor loans. The financial institution’s now put aside a complete of £1.2bn to cowl potential liabilities.

There’s no assure, nonetheless, that this might be sufficient. I’ve seen estimates that the ultimate whole could possibly be nearer to £3.9bn – greater than triple the corporate’s at present planning for.

The Supreme Courtroom is ready to rule on the problem in April. However we don’t have any particular details about what the result of the continued investigation is prone to be. That makes me very cautious of making an attempt to anticipate it.

If issues go nicely, the inventory could possibly be set for an additional large elevate, however it’s an enormous threat, from my perspective.

Investing ideas

By itself, the actual fact Lloyds shares are buying and selling above the agency’s guide worth doesn’t put me off. I don’t assume the prospect of the financial institution liquidating all of its property was ever actually on the playing cards.

A better share worth nonetheless, does improve the general threat with the inventory. And it means I’m not keen to purchase it at at present’s costs – regardless that I most likely ought to have performed so a yr in the past.