Is the Lloyds (LON:LLOY) share price good value?

Here's why how cheap or expensive shares in large cap Lloyds Banking (LON:LLOY)matters.

Stacks of academic research covering different time frames and regions of the world all come to the same conclusion: over time and on average, cheap stocks outperform expensive stocks.

This sounds so glaringly simple and obvious. So, how come we're not all rich?

The fact is cheap shares are often cheap for a reason. They can look unappetising. And, while the evidence shows that maintaining a value strategy through boom and bust will be rewarded, sticking with it is actually extraordinarily hard. Yet the evidence is so compelling that value is one of Stockopedia's three main factors in investment returns.

One of the masters of value (and factor) investing is Jim O'Shaughnessy, the founder of O’Shaughnessy Asset Management (OSAM). In the 4th edition of his groundbreaking investment research tome What Works on Wall St, O’Shaughnessy showed that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.

It was from this robust insight that Stockopedia’s Value Rank was born, its synergy coming from the following simple valuation ratios:

• Price to Book Value
• Price to Earnings
• Price to Free Cash Flow
• Dividend Yield %
• Price to Sales
• Earnings Yield %

How does Lloyds Banking stack up?

The Value Rank: how does Lloyds Banking stack up?

We can see by using Lloyds Banking’s StockReport that the group has a:

• Rolling price to book value of 0.89,
• Rolling price to earnings ratio of 9.18
• A negative trailing twelve-month price to free cash flow
• Rolling dividend yield of 5.26%
• Trailing twelve-month price to sales ratio of 1.55

When we add all of these together, we find that Lloyds Banking has a Value Rank of 77. Investing in high-value stocks requires finesse and a sturdy constitution but, when cheap stocks come good, the payoff can be large and sudden. One point that does jump out is the group's negative free cash flow - more research is required to understand why this is.

Nevertheless, Lloyds Banking’s Value Rank of 77 puts it in the cheapest quartile of the stock market. That is certainly a promising jumping off point for our analysis but it is not the whole story.

A smarter way to invest in value stocks is to find the best quality value stocks or value stocks whose share prices are turning around - history shows that you can do much better than a passive investor by combining factors, so it makes sense to consider Lloyds Banking’s Value Rank alongside its Momentum and Quality Ranks.

What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Lloyds Banking that you can find out about here.