Lloyds (LSE: LLOY) shares remain a very popular investment. It seems the bank’s low, sub-50p share price is very appealing to UK investors.
Currently, I don’t own any Lloyds shares. Are they worth buying for my portfolio for 2023 and beyond? Let’s discuss.
Three reasons to buy
There are a number of reasons to be optimistic about Lloyds right now. For a start, the bank is benefiting from higher interest rates. When these are higher, banks can generate larger spreads between borrowing and lending rates. This typically leads to larger profits.
The Bank of England (BoE) has already raised rates eight times since December 2021 and is expected to keep going. Currently, the market is predicting the BoE base rate will top 4% in early 2023 and rise above 5% by late 2023.
This should provide a boost for Lloyds, which posted 15% growth in underlying net interest income last quarter.
Secondly, Lloyds shares appear to be very cheap right now. At present, analysts expect the bank to generate earnings per share of 7p for 2022. That puts the stock on a forward-looking price-to-earnings (P/E) ratio of just 6.6. That’s a low valuation.
Third, there’s a decent dividend on offer here. Lloyds is expected to reward investors with dividend payouts of 2.43p per share for 2022 and 2.73p per share for 2023. At today’s share price, those estimated payouts equate to yields of over 5%. So even if Lloyds’ share price was to remain flat in 2023, investors may still generate decent returns through dividend payments.
The big risk to Lloyds’ share price
One major risk here however, is the UK economy. As Britain’s biggest mortgage lender, Lloyds’ fortunes are closely tied to UK economic conditions. And right now, conditions are deteriorating rapidly.
Indeed, last month, the Office for Budget Responsibility (OBR) said the UK economy (which is already in a recession) is likely to shrink by 2% in the next 18 months, resulting in more than half a million job losses by the second half of 2024.
“The medium-term fiscal outlook has materially worsened since our March forecast due to a weaker economy, higher interest rates, and higher inflation”, the OBR said in a statement.
Meanwhile, the BoE also recently said the UK is facing its longest recession since records began. This is bad news for Lloyds as weaker economic conditions are likely to lead to a higher rate of loan defaults.
Last quarter, Lloyds booked £668m in impairment charges and this had a significant impact on overall profits. If economic conditions worsen, I’d expect this impairment figure to rise. This could potentially lead to lower earnings, a lower share price, and possibly even lower dividends too.
My move now
Weighing up the bull case versus the bear case here, I’m going to leave Lloyds shares on my watchlist for now. The shares do look cheap. However, with the UK economy in a precarious position, I’m happy to pass on them and focus on other investment opportunities.
