It seems like an age that Lloyds (LSE: LLOY) shares have hovered around the 40p mark. But this hasn’t always been the case. Five years ago, I would have forked out 55p for a share in the Black Horse Bank. Towards the tail end of 2019, I would have paid over 64p!
As a shareholder, I must be asking the same question as everyone else: when will the Lloyds share price rise again?
In all honesty, I’m not too fussed for now. At their current price, I think the shares are a steal.
Extra income
I want to have as much cash invested as possible as I know the power of long-term investing. As such, I’m always looking for shares that provide a passive income, which I can then take and reinvest. Safe to say, Lloyds ticks this box. At 6%, the business offers one of the most lucrative dividend yields on the FTSE 100.
Of course, it’s worth noting here that dividends can be volatile. And they’re not always guaranteed. We’ve seen the impact of events such as the global financial crash of 2008. More recently, the pandemic saw a host of companies halting their dividends.
However, with Lloyds’ dividend covered around three times by earnings, I’m confident of the business paying out. On top of that, some analysts think its yield could reach up to 7% in the next few years.
Not all plain sailing
While the extra income the stock generates is nice, I’m wary of the risks surrounding Lloyds.
The firm’s sole focus is on the UK economy. And this makes it more prone to a domestic downturn than its competitors. Many predict the UK economy won’t see growth until 2025 at the earliest.
As the UK’s largest mortgage lender, predictions of house prices continuing to fall for the next few years present further trouble. With that, I expect the next few months to be tough for the share price.
Long-term outlook
Regardless of these issues, I’m still bullish on the long-term outlook.
First of all, the stock looks cheap. Lloyds’ price-to-book ratio, which compares a stock’s price relative to the value of its assets, is just 0.5. On top of that, its price-to-earnings ratio for the last 12 months sits at just five.
I also think Lloyds is about to enter a period of strong growth. While higher interest rates translate to higher a net interest margin (NIM), as we are seeing now, it also means higher impairment charges. However, with rates closer to the optimal level of 2%-3%, which they are expected to reach by the end of 2024, Lloyds will continue to benefit from a higher NIM, yet impairment charges will become less of a worry.
On top of that, despite the challenges it will face in the near term, it has the balance sheet to manage them. Its CET1 capital ratio (a measure of solvency) is 14.6%. This is higher than its 12.5% target, and 1% above Lloyds’ management buffer.
Finally, with the firm investing £3bn into a strategic investment for its long-term future, I’m confident in the moves the bank is taking.
At 43p, I think Lloyds shares look like a steal. It’s a staple of my portfolio. And in the weeks ahead, I’ll be topping up my position.
