The last few weeks have seen me pondering a question I’ve asked before. Why are Lloyds (LSE: LLOY) shares so cheap?
As the share price hovers around the 40p level, and as I continue my quest to add high-quality companies to my portfolio, I can’t help but view the stock as a great buying opportunity.
The stock’s performance
Before we dive in, let’s look at how it’s performed in recent years.
To be honest, the last five years haven’t been great for shareholders of the Black Horse Bank. Back in 2018, a share would have set me back just shy of 60p. Today, I can buy one for 33% less.
In the last 12 months, the stock has had a taste of life above the 50p mark. However, following the collapse of Silicon Valley Bank and the detrimental impact this had on investor confidence, it’s been on a steady decline of late. This year alone, it’s fallen by 15%.
Remaining positive
Despite this fall, I’m still bullish on Lloyds. I’m not worried about where the share price will be sitting in a few months. It’s 10 years’ time that I’m worried about.
With that, I’m happy to see the work the business is doing to lay the foundations for its future. This is largely through the new strategy it introduced last February. With plans to invest £3bn over three years, the hopes are that this investment will “drive revenue growth and diversification across all… main businesses.” As a long-term investor, these are the sorts of initiatives I want to see.
The risks
Lloyds isn’t without its risks, of course. One of the largest threats facing the company is lingering inflation. Many companies within the financial sector have posted poor performances this year. And while the Bank of England has hiked interest rates to combat this, leading to higher net interest margins for Lloyds, it also means customers are more likely to default on payments.
Its sole focus on the UK may also have some investors concerned. This makes it more prone to a poor performance if the UK economy is weak than its more international competitors.
Passive income
Despite that, as I continue my journey to seek investment opportunities that provide passive income, Lloyds looks attractive.
With its shares having a dividend yield of 6.3%, it sits comfortably above the average of the FTSE 100. With many banks coming under scrutiny lately regarding offering low interest rates on savings accounts, it also beats me leaving my cash sitting in the bank.
It’s worth noting here that dividends can be reduced by a business at any time. Even worse, they can be stopped altogether. Yet with Lloyds’ dividend covered around three times by earnings, I think a payout in the future looks likely.
My move
I’m hoping to have some spare cash in November. And with it, I’ll be buying some more Lloyds shares. In the months ahead I think the bank may continue to struggle. But I’m not one to split hairs over a few basis points. I’m confident the business is laying solid foundations for future growth. And with a yield comfortably over 6%, the passive income should tide me over should its share price continue to wobble.
