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Lloyd’s (LSE: LOY) shares have had a strong 12 months. They didn’t exactly rise, but they didn’t fall either. Given today’s massive global uncertainty and US bear market, I consider that a win.
Investors have largely resisted the temptation to dump the UK-focused high street bank from their portfolios. I think now is a good time to buy them. Lloyd’s shares are down 31% over the past five years, which I think makes them trade at an attractive valuation.
Incredibly, investors can buy Lloyds Banking Group stock at just 5.6 times earnings. That’s a fraction of the total average review. FTSE 100 Earnings for 14.08 times. The bank’s price-to-book ratio is just 0.6, less than 1 digit of what is considered fair valuation.
Although I don’t expect him to emerge as an Olympic runner-up, the stock seems well-priced. Lloyd’s has had a number of false starts since the financial crisis, and still has many hurdles to overcome before returning to the reliable revenue machine it once was.
The obvious drawback is the UK’s high cost of living, which could lead to a significant increase in small business and personal customer shortages. Lloyds is the UK’s largest mortgage lender and happily the property market is currently strong. How long this can last remains to be seen as the storm is headed our way.
Bank stocks typically struggle in recessions, but there’s one reason why this time might be different. Interest rates look set to rise sharply as the Bank of England struggles to deal with raging inflation. That allows Lloyds to widen its net interest margins, the difference between what borrowers charge and what savers pay.
I will buy Lloyd for the product, with a growth bonus
The BoE has raised rates five times since December from 0.1% to 1.75%, but Lloyds has not raised the savings rate that much. For example, the Easy Savings account pays just 0.2%. That’s a rotten deal for savers, of course, but good for the bottom line.
Bank of America described Lloyd’s credit quality as “strong” and its “stress conditions” indicating “resilience”. That gives me more comfort.
Although Lloyd’s shares have not risen much for some time, I don’t expect them to fall much. Well today’s bad news has paid off with that low estimate. It is somewhat irrelevant. I aim to buy and hold Lloyd’s shares (and other stocks) for at least 10 years, which should give them plenty of time to recover.
The real attraction is the dividend, which is currently 4.6%. This is comfortably above the FTSE 100 average of 3.53%. Lloyd’s shares are forecast to return a more generous 5.6 per cent next year. However, that income is still covered three times by revenues. Adds a strong argument for me to buy them today.