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Lloyd’s (LSE:LLOY) shares haven’t exactly moved higher in recent months, pushing above 50p on two occasions. There was some volatility, but this happened despite a huge tailwind for the banks.
So let’s take a closer look at this FTSE 100 Think about Stewart’s odds and why it’s a top buy for my portfolio!
10 year trend
If I had bought £1,000 of Lloyds shares 10 years ago, I would have £1,175 today plus any dividends I receive over that period. That’s a good return, but clearly not great, and represents annual growth of 1.75 percent.
In the year The bank had to be re-created after the 2008 crash, when Sir Antonio Horta-Osorio was sued by the government for undermining the bank’s operations. As one might imagine with his chivalry, Horta-Osorio largely achieved this.
During the pandemic, stock prices fell and dividend payouts fell. In the year Lloyds’ dividend for 2018 is 3.21p. In the following year, the interim dividend increased by around 4.7%. However, as the epidemic began, the bank did not pay the final dividend.
With dividend payouts still relatively depressed and some uncertainty surrounding the UK economy, investors have not rushed into Lloyds.
Things are looking up.
We have predictions of a recession and this will not bode well for credit quality. But banks, including Lloyd’s, have set aside money for defaults linked to inflation and economic downturns.
However, interest rates are expected to rise in 2022 and continue to rise through 2023. Some analysts see the Bank of England’s base rate reaching 4% by 2023. It could rise if the chancellor’s meager budget pushes inflation higher.
Likewise, net interest margins (NIMs) – the difference between savings and loan amounts – are increasing. In fact, Lloyds is earning more interest on the money it leaves with the central bank.
Lloyds is a much smaller bank than it was before the 2008 crash, but one reason for its share price trading at a fraction of its pre-2008 level is interest rates. We’ve had more than a decade of near-zero interest rates. Now, finally, loan margins are increasing dramatically.
Encouragement from the new cabinet
It will not be as big as some expected, but the banks are net income earners from the new Chancellor’s budget. Some think that the banks will be the big winners. The corporate tax has been suspended at 19% (not raised to 25) and some analysts have speculated that the bank surcharge tax will be reduced from 8% to 3% as proposed by Rishi Sunak.
However, the latter reduction has been cancelled. Therefore, in future, banks will pay 19% corporation tax and an initial 8% surcharge. Under the new chancellor there is a net profit of 1% for banks. It’s small, but it’s still a victory.
New projects
I am particularly fond of Lloyds’s plan to enter the rental market by buying 50,000 homes over the next 10 years. I see property as an economically safe environment and this project should be a steady income generator. After all, the UK has an acute housing shortage.
For me, Lloyds is a solid buy right now. I own Lloyd’s shares, but would like to buy more at the current price.