The number of mortgage approvals have just hit the lowest level since June 2020. And that’s not good news for Lloyds Banking Group (LSE: LLOY). But Lloyds shares have actually been picking up a little since October.
I see three good reasons to buy Lloyds shares as we head into 2023.
Dividend
For 2021, Lloyds provided a 4.2% dividend yield. And the payout was covered 3.75 times by earnings.
For 2022, forecasts suggest a 4.6% yield. Lloyds’ Q3 trading update showed a quarterly decline in profit before tax, to £4,480m, from £5,103m in the same quarter a year previously.
But I think that’s pretty decent in the latest economic conditions. The balance sheet looks strong. And liquidity measures like the bank’s CET1 ratio look fine. So I’m reasonably confident.
Analysts predict dividend rises in the next couple of years, with earnings remaining steady. I can’t put too much faith in forecasters, but seeing positivity at this late stage in the current year has to be good. The biggest risk, surely, is that pressures on profits might force Lloyds to cut its dividend next year.
Recession
Fears of recession and inflation have held Lloyds shares back all year. But, for those of use with a long-term investing horizon, I reckon that might have made 2022 a great year to buy bank shares.
Buy when others are fearful, suggested ace investor Warren Buffett. And I’ve rarely seen investors more fearful than over the past 12 months.
When economic downturn was a shadowy scary thing in the future, investors really didn’t like the unknowns. But the fears have become facts. We’re into recession. And we have a clearer outlook on where inflation is likely to go.
And you know what? It’s not the end of the world after all. I reckon the banks are likely to get through it in reasonable health. And it seems sentiment towards the sector might already be improving.
There’s a danger I’m being too optimistic. And if the next year or two turn out harder than I’m perhaps naively supposing, well, my mistake should be come clear.
Valuation
My third reason is simply the current valuation of Lloyds shares. Over the long term, I’d expect bank shares to be valued at around the FTSE 100 average.
They’re not pioneers of anything, but they reflect the financial performance of the whole economy. When UK companies are doing well, so should the banks. So yes, I’d say a middling valuation is probably about right.
Today, forecasts put Lloyds on a price-to-earnings (P/E) multiple of under seven. That’s less than half the Footsie’s long-term average.
Lloyds stock has been on a depressed valuation for years. I’ve been calling for an upwards revaluation for probably around a decade, and it’s not yet come. So maybe banks will remain lowly valued for a while yet. But I’m happy to keep taking the dividends while I wait. And I intend to buy more Lloyds shares through 2023, to lock in my long-term yields.
