Lloyds (LSE: LLOY) shares are on a surge. Despite being down 9% year to date, this week the stock is up around 6%. The last 12 months have seen it rise by 7%.
In times gone by, a share in the FTSE 100 bank would set you back as much as 65p. Today a share costs just over 45p.
For this price, I’d rush to add Lloyds shares to my portfolio. Here’s why.
Lloyds share price history
Before we start, let’s take a look at why the Lloyds share price has fallen in the last few years.
The stock entered 2020 trading at 63p. However, with the pandemic causing markets to fall across the globe, the year saw Lloyds stock drop 42%, and at times to as low as 25p.
Since then, it has made small recoveries but has failed to sit above the 50p mark for a noticeable period.
With racing inflation, this year has told a similar tale. Consumers are tightening their belts and markets are losing value as rates continue to rise. Recently, it was predicted that inflation could spike to as high as 22%.
Why I’d buy
So, with such a bleak outlook, why would I buy Lloyds shares?
Well, the first reason is rising interest rates. To counteract rising inflation, the Bank of England has been hiking rates. Its most recent hike was to 1.75%. However, there have been predictions this could go as high as 3%-4%.
For Lloyds, this is good news. And this is because the firm can charge customers more when they borrow from it. Its net income rose 12% in the first half of the year, with interest rates likely playing a part in this. It also saw its net interest margin increase as the firm raised its outlook for the year.
With this said, it’s not just the potential of higher interest rates that attracts me. The stock currently trades on a price-to-earnings ratio of 7.5. This is below the ‘benchmark’ of 10. And to me this signifies that Lloyds is undervalued.
A smart play with rising inflation would also be to create a stream of passive income. And with a dividend yield of 4.7%, Lloyds offers this.
Lloyds concerns
Even with this, there are a couple of factors that are of concern.
While rising interest rates are positive, they could also see customers default on their payments. For Lloyds, this would clearly be bad news.
On top of this, as one of the UK’s largest mortgage lenders, Lloyds could also be affected by the UK housing market showing signs of a slowdown. In its latest results, homebuilder Barratt Developments said that the number of homes being reserved was now below pre-pandemic levels. As a result, it expects house price growth to slow.
However, I’d still buy Lloyds shares today. The inevitable rise in interest rates will benefit the bank. And with its low valuation and dividends, the stock would be a strong addition to my portfolio. While a housing market slowdown may pose a threat, I think the moves Lloyds is making in the rental market will help offset this. For 45p, I’d rush to buy.
