Lloyds (LSE: LLOY) shares are showing signs of life after jumping almost a quarter in the past three months. This isn’t the only FTSE 100 share that’s doing well as the index breaks all-time highs, but I think there’s more to come.
Investors in the UK’s benchmark blue-chip index have a right to feel optimistic today. Yet those like me who prefer to buy shares when they’re cheap, rather than rising strongly, are also a little wary.
FTSE 100 shares are back
I went on a FTSE 100 shopping spree last autumn and every stock I bought has jumped since then. Persimmon (28.82%), Rio Tinto (14.42%) and Rolls-Royce (31.08%) all delivered instant gratification. The last stock I bought was Lloyds itself, and I’m currently up 8.74%.
When I look at the index today, I don’t see as many stone cold buying opportunities as I did three or four months ago. Yet Lloyds still grabs me. Its stock still trades at just 7.1 times earnings. Its price-to-book ratio is 0.7 (where 1 is seen as fair value). That’s not as cheap as it was before, but it’s still cheap.
It’s a similar story with the dividend. While the yield has slipped to 3.8%, it’s still handsomely covered 3.8 times by earnings, and the future is bright. Lloyds shares are forecast to yield 5.2%, and cover will still be comfortable at 2.7. I’m looking forward to receiving my dividend payments so that I can plough them back into Lloyds stock.
While the share price has done well lately, it’s still down 0.21% measured over one year and 21.17% over five years. This ship hasn’t sailed.
I don’t expect Lloyds to go full steam ahead in 2023 though. We all know how much trouble the UK economy is in. While higher interest rates allow the banks to widen their net interest margins, they also put pressure on the housing market.
Long-term buy-and-hold for income and growth
Lloyds can’t hope to counter a slowdown at home with expansion overseas, given its high domestic exposure. This is a British bank, and Britain isn’t the economic force it was.
On the other hand, I think the doom has been overdone. We saw that on Friday, when it turned out the UK didn’t slip into recession after all last year (although it was a close run thing).
Property sales and home prices may be falling, but as mortgage rates ease, the market may still avoid a wipeout. Also, blue-chip dividend aristocrats like Lloyds are finally receiving the interest they deserve from investors now that the US tech boom has lost its glamour.
I see today’s troubles as a buying opportunity, rather than a threat. As I said, I like to buy stocks when the outlook is bleak and prices are low. That’s much better than when they’re booming and investors are bidding prices up. Lloyds is in that position today.
I won’t be adding to my holding. But that’s only because I have enough exposure from my recent purchase and want to diversify into other sectors. But I think Lloyds is still a buy at today’s price of 53.01p.
