[Blank] Hasn’t Been This Cheap Since WWII… Seriously

Life in Great Britain during World War II was difficult, to say the least.

It was hard to remain optimistic when the survival of the entire nation was in question.

Everyone was impacted.

Men of fighting age were sent off to join the front lines in Continental Europe. Woman were called upon to work grueling hours and take over the jobs traditionally done by men. Children were evacuated from the cities and into the countryside where there was less risk of bomb raids.

Rationing of food began almost as soon as the war did. Rationing of clothing followed shortly thereafter. Eventually, almost every household item was either in very short supply or completely unobtainable.

The country endured five years of air raids from the Nazi “Blitz.” Tens of thousands of people were killed and even more were seriously injured.

People were hungry, tired and scared.

It was a terrible time in British history and their stock market reflected that fact. Stocks were dirt cheap.

Yet somehow, one important valuation metric today shows that the British Stock market is as cheap today as it was in World War II… which for informed investors presents an opportunity.

Fancy A Nice Dividend? Let’s Head To Great Britain

The British stock market has underperformed globally over the past couple of years. Concerns over the eventual impact that Brexit will have on the British economy has soured investors on the U.K.

As share prices have come down, dividend yields have gone higher. The entire FTSE 100 index now yields over 4 percent, more than double the yield on the S&P 500.

As a result, the gap between the yield on British stocks and the yield available on 10-year British government bonds (gilts) has gotten very wide. That’s very bullish for British stocks.

The only other times in history that the yield on British stocks has been this much better than the yield on 10-year gilts was during the two world wars.1

This is a pretty clear buy signal for British stocks — especially dividend paying British stocks.

One of the best dividend opportunities that I see in the British market today is Lloyds Banking Group (LYG).

Over the past two years, the share price of Lloyds has come down while the dividend being paid has actually increased. As a result, the dividend yield offered from purchasing shares of Lloyds has soared to 5.3%.

That’s up from just 2% before Brexit rocked U.K. markets, which overall is a hefty income stream for a fundamentally strong company like Lloyds.

The Other Two Numbers You Need To Know About Lloyds

The fat dividend yield speaks loudly, but there are two other numbers that are equally important.

To measure their performance, banks focus on their efficiency ratio. It is a simple calculation that divides the noninterest expenses of a bank by its total net income.

The lower the number, the more efficient the bank. That’s because a lower number means that you are spending less to generate more income.

The efficiency ratio for Lloyds in 2017 was just under 47 percent.

That is fantastic.

For some perspective, consider that anything under 50 percent is admirable and the average American bank has an efficiency ratio right around 60 percent.2

This tells us that Lloyds is an extremely well-run operation.

In addition to performing well operationally, Lloyds’ share price is currently very cheap. On a price to book value basis, Lloyds currently trades at just 0.91 times.

That is a big discount to the 1.5 to 1.6 times price to book value that large U.S. banks like Wells Fargo and JP Morgan trade for, which is also where Lloyds once traded before Brexit shook the British stock market…

To get back to that level, the share price would need to increase 64 percent.

I expect that as the overreaction to Brexit eases over time, Lloyds shares could do just that.

Meanwhile, people who buy shares of this well-run company today can enjoy a 5.1 percent yield while waiting for that share price increase to happen.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1U.K. Stocks Haven’t Been This Cheap Since WWII by This Measure, Bloomberg
2Full List: Ranking America’s 100 Largest Banks 2018, Forbes

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