It’s been a miserable start to 2024 for the Lloyds (LSE:LLOY) share price. As I type, it’s tumbled 12% in only a couple of weeks. That’s far worse than the 3.5% fall seen in the FTSE 100.
But could the bank end up outperforming the index by the end of the year? Here’s my take.
Problems a-plenty
The drop in Lloyds stock since markets re-opened isn’t hard to fathom. The UK economy continues to stutter along, with growth likely to remain subdued for some time.
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News that inflation has climbed back to 4% also surprised analysts and raised concerns that interest rate cuts could now be delayed.
A higher-for-longer environment not only impacts demand from house buyers. It also increases the chance that existing borrowers will default. And Lloyds is the biggest mortgage lender in the UK.
The threat of a £1bn fine from the Financial Conduct Authority (FCA) if the bank is found to have been charging unfair costs on car finance commissions is another thing it could do without.
All priced in?
Still, I reckon there are reasons to be optimistic. Take the valuation.
Right now, I can pick up the shares for just 6 times forecast FY24 earnings. That may not be cheap relative to peers. But it’s very low relative to the market as a whole. And considering we’re looking at whether Lloyds can outperform the FTSE 100, I think that might be significant.
History shows that buying when no one else will can deliver above-average returns for those prepared to be patient. And I don’t think the bank’s problems are permanent.
An economic chink of light might be all that’s needed for the sector to do better than other parts of the market.
It’s also worth noting that Lloyds also benefits from higher interest rates. This is because its net interest margin — the difference between what it charges to savers and borrowers — is larger.
Don’t forget the dividends
One other thing I like about Lloyds is the passive income stream. Based on current forecasts, the stock is down to yield 7.5% in 2024. That’s almost double what I’d get from a FTSE 100 tracker (which also has an ongoing fee).
With the payout likely to be easily covered by profit, I’d say there’s a strong chance of holders receiving this money.
Naturally, we’ll only know that for sure when it happens. That’s why spreading my cash around different parts of the market is prudent.
Better prospects
With expectations already low, I think Lloyds could outpace the FTSE 100 this year, particularly if other over-represented industries in the index, such as mining or oil, suffer and act as a hindrance to the latter.
Then again, no one truly knows what will happen. There are too many variables that influence the final result.
And a Fool like me would argue that a year doesn’t mean all that much anyway. It’s the outcome over many years I’m interested in.
Speaking of which, the long-term returns for Lloyds have been poor. While dividends would have cushioned the blow, the share price is still down 27% in five years.
It’s for this reason that I won’t be investing today. Put simply, I think there are far higher-quality stocks trading at dirt cheap prices that offer better prospects.
