As I write on Wednesday afternoon, shares in Lloyds Banking Group (LSE: LLOY) hover around 46.5p, up 0.8% today. After a promising start to 2022, Lloyds shares have fallen slightly this year. So do I back this bank stock to leap in 2023?
Lloyds shares have gone nowhere for a decade
Looking at the long-term chart for Lloyds shares, they have made no ground for at least 10 years. Indeed, I could have bought the Black Horse bank’s stock at today’s price in December 2012. Here’s how the share price has performed over the short and medium term:
| Five days | +4.1% |
| One month | +1.5% |
| Six months | +7.0% |
| 2022 YTD | -2.8% |
| One year | -3.2% |
| Five years | -31.7% |
Despite gaining ground over the past half-year, Lloyds stock is down almost 3% in 2022, plus it’s lost almost a third of its value over five years. However, these figures excluded cash dividends, which would boost these returns by several percentage points each year. Nevertheless, Lloyds has not been a great investment for many a year.
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We own Lloyds stock
My wife bought into Lloyds in late-June at an all-in price just below 43.5p. Hence, we’re currently sitting on a paper profit of 3p a share, or almost exactly 7%. So far, so good for a FTSE 100 stock.
I’m positive on Lloyds stock and have high hopes for these shares in the coming years. As a fundamental investor, I aim to buy into quality companies at sensible prices. Based on its current fundamentals, this stock still looks too cheap to me — despite being a near-perpetual ‘value trap’.
At 46.5p, this share is roughly midway between its 52-week low of 38.1p and its 52-week high of 56p. This values the group at £31.3bn — a fairly modest price tag for one of the UK’s biggest financial firms.
Furthermore, Lloyds trades on a reasonable price-to-earnings ratio of 7.7 and a chunky earnings yield of 13.0%. Also, its above-average dividend yield of 4.6% a year is covered 2.8 times by earnings. To me, this suggests plenty of headroom for this cash payout to increase over time. And as an income investor, I appreciate the long-term value of decent dividends.
2023 will be tough for banks
Almost universally, economists predict a prolonged UK recession next year. Usually, this would spell bad news for British banks, but Lloyds’ balance sheet is very strong and packed with high-quality assets. Thus, although I fully expect bad debts and loan losses to rise in 2023, I’m sure Lloyds can take this pressure.
Also, a toxic combination of soaring inflation and skyrocketing energy bills will restrict consumer and corporate spending and borrowing next year. This would hit Lloyds 2023 revenues, profits, and earnings. Again, I see this outcome as largely baked into the current share price.
In summary, I see Lloyds shares as a low-risk bet on a post-2023 economic recovery. And that’s why I’m prepared to buy more shares if they fall much further!
