After hitting 596p in April 1999, the Lloyds (LSE: LLOY) share price has been inflicting pain and misery on shareholders for more than two decades.
Even before the 2007 financial crisis, it had crashed to 286p per share. It bottomed out at 28.9p in March 2009 and has largely flatlined since. I bought Lloyds at 45p per share on 2 June, and for just 40p on 8 September. That’s 93.3% below its 1999 peak.
Buying Lloyds shares is a triumph of hope over experience. British investors must be a hopeful bunch, as it’s still the UK’s most traded stock, right up there with mega-growth stock Rolls-Royce.
Too cheap to resist?
There are two main attractions. The first is that Lloyds shares are dirt cheap, trading at just 6.57 times earning. The price-to-book value is 0.6, where a figure of one is seen as fair value. The low valuation offers protection against further share price falls and plenty of bounce-back potential.
The second big attraction is the dividend. Lloyds shares are forecast to yield 5.8% in 2023, nicely covered 2.8 times by earnings. This gives scope for further growth in 2024, when markets predict a yield of 6.45%.
Lloyds has cleared up most of the mess left by the financial crisis. In 2022, it made a full-year profit of £6.92bn. 2023 looks positive, with Q3 pre-tax profits jumping from £576m to £1.86bn year-on-year, beating estimates.
Yet the share price has refused to respond, until now. It’s jumped 9.8% in the last month, despite little company news of note (aside from yet more branch closures). Yet it’s only 3.27% higher than one year ago.
December’s rally was triggered by hopes that interest rates have peaked. Markets now expect the UK base rate to fall from today’s 5.25% to 3.5% across 2024.
If they’re right, it should help spare the UK house price crash, and all the costly arrears, defaults and repossessions that would entail. As Lloyds is the UK’s biggest mortgage lender, it’s likely to be the biggest beneficiary.
Brilliant dividend income stock
Yet falling interest rates are a double-edged sword for the banks. They will squeeze net interest margins, the difference between what banks pay savers and charge borrowers. This is a key metric for investors.
The big high street banks have come in for severe (and deserved) criticism for paying derisory savings rates, but it hasn’t half helped the bottom line.
My Lloyds shares are up 10.46% in total, boosted by my first dividend on 14 September. I’m short of investable cash after Christmas, otherwise I’d top up my stake today.
Lloyds is my favourite FTSE 100 bank, as it restricts itself to the safer end of the banking market. Unlike Barclays, there’s no risky investment banking arm. It doesn’t have HSBC‘s Chinese exposure and looks more solid than accident prone NatWest.
2024 could be bumpy. House prices are still falling. The UK could even slip into recession. Both would hurt Lloyds. But I think its shares look terrific value despite the recent surge.
My personal experience of holding Lloyds shares has been positive, so far. I’ve got grounds to hope for more.
