Lloyds (LSE: LLOY) shares have enjoyed a solid 12 months. They haven’t actually risen, but they haven’t fallen, either. Given today’s huge global uncertainty and the US bear market, I consider that a win.
Investors have largely resisted the temptation to drop the UK-focused high street bank from their portfolios. I think now is a good time to buy them. Lloyds shares are down 31% on five years ago, which I reckon leaves them trading at a tempting valuation.
Incredibly, investors can buy Lloyds Banking Group stock for just 5.6 times earnings. That is a fraction of the average valuation across the FTSE 100 of 14.08 times earnings. The bank’s price-to-book value is just 0.6, well below the figure of 1 that is considered fair pricing.
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The stock looks good value although I’m not expecting it to take off like an Olympic sprinter. Lloyds has suffered too many false starts since the financial crisis, and still faces plenty of hurdles before it returns to being the reliable income machine of yore.
The obvious hurdle is that the UK is in the middle of a cost-of-living crisis, and this could lead to a spike in small business and private customer defaults. Lloyds is the UK’s largest mortgage lender and happily, the property market is solid for now. It remains to be seen how long that can last, given the storms heading our way.
Banking stocks normally struggle in a recession, but there is one reason why it could be different this time. Interest rates look set to rise sharply, as the Bank of England struggles to combat raging inflation. That will allow Lloyds to widen its net interest margins, the difference between what it charges borrowers and pays savers.
I’d buy Lloyds for the yield, with growth a bonus
The BoE has hiked base rates five times from 0.1% to 1.75% since December, but Lloyds has not increased its savings rates anywhere near as much. For example, its Easy Saver account pays just 0.2%. That is a rotten deal for savers, of course, but good for the bottom line.
Bank of America recently also described Lloyds’ credit quality as “robust” while its “stress scenario” revealed “resilience”. That offers me further comfort.
Although Lloyds shares may not grow much for some time, I would not expect them to fall much further, either. A good deal of today’s bad news has been priced into that low valuation. In a way, it’s irrelevant. I would aim to buy and hold Lloyds shares (and any other stock) for a minimum of 10 years, which should give them plenty of time to recover.
The real attraction is the dividend yield, which is currently 4.6%. That is comfortably above the FTSE 100 average of 3.53%. Next year, Lloyds shares are forecast to yield an even more generous 5.6%. Yet that income will still be covered three times by earnings. It adds up to a strong argument for me buying them today.
