It can be tempting to buy Lloyds (LSE:LLOY) shares when they’re around 40p, and sell when there around 50p. After all, the stock appears to have fallen into something of a pattern.
But investing’s normally about taking a long-term view on a stock with strong fundamentals. So should I just leave my investments in Lloyds until the decade’s out?
Sensible investing
There’s a clear difference between investing and trading when it comes to navigating the market. Investing involves taking a long-term approach, focusing on steady growth over a period of years. It’s like planting a seed and nurturing it for a fruitful harvest in the future.
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Trading, on the other hand, is all about short-term gains. It’s more about capitalising on price movements within minutes, days, weeks, or even months. It’s more akin to riding a wave, trying to catch the perfect moment of entry and exit.
Ultimately, I believe trading should be left to the professional, while the rest of us take long-term positions on stocks we believe in.
Do I believe in Lloyds?
I believe Lloyds is one of the strongest investment opportunities on the FTSE 100. Firstly, it offers a very attractive 5.44% dividend yield. That’s far above the index average and it also means I’m not looking for exceptional share price growth.
If I’m aiming for double-digit growth in my portfolio as a whole, I’d want to see the Lloyds share price push up at least around 4.6% annually. Coupled with the dividend, that would lead to double-digit returns.
I’d also suggest Lloyds’ dividend looks very sustainable. Over the last 12 months, the dividend was covered 2.75 times by earnings. That’s far above the benchmark for safety — which is generally two times for cyclical industries.
Next, do I think the Lloyds share price can appreciate in value from here? Well, Lloyds trades at 7.5 times forward earnings. Compared to recent years, that’s a little expensive, but it reflects the fact that 2024 is likely to be a little less profitable due to fines falling within these 12 months.
However, moving forward, the price-to-earnings (P/E) ratio falls to 6.8 times in 2025, based on projected earnings, and 5.9 times in 2026. It’s unlikely that this pace of earnings growth is sustainable through to the end of the decade, but it’s certainly positive to see earnings grow so quickly in the medium term.
Finally, when we compare these ratios to US banks, some of which, notably JPMorgan, trade with P/E ratios that are double as high, it becomes clear that Lloyds is trading at a discount. Strong earnings growth, and a discount versus international peers… it’s certainly compelling.
The bottom line
Lloyds is a cyclical stock and that means it can be volatile, especially when we’re experiencing tough economic conditions like we have today. After all, we’re still not out of the woods yet from an economic perspective.
As such, it may pay me to just try and forget about my Lloyds shares and trust in the strong earnings projections, attractive valuation and well-covered dividends. I might just lock my Lloyds shares away until 2030.
