The Lloyds (LSE: LLOY) share price has been largely flat since the start of 2021. But with dividend income likely to return in 2021, could it be a sound investment for my portfolio?
Pre-pandemic, Lloyds supported one of the most generous dividend yields, offering between 5.5% and 7% dividend income per year.
That all ended as Covid-19 hit. Worried about an economic crash, the Bank of England put a sector-wide kibosh on plans for £8bn-worth of dividends. Barclays, HSBC, Royal Bank of Scotland; every major bank was forced to stop paying its shareholders dividend income. It was a cruel blow to cash-strapped investors. And Lloyds was no exception.
Lloyds share price to rise?
Thankfully, the City regulator lifted the ban in December 2020. And the bank has since signalled willingness to return vital dividend cash to its shareholders. So as an investment prospect, Lloyds is suddenly back on my radar.
The Bank of England now thinks that UK families will “fuel a rapid return to prosperity with a multibillion-pound spending spree”, the Guardian reported this week.
The central bank’s chief economist, Andy Haldane, believes that with the Covid-19 vaccine rollout in play, there are “enormous amounts of pent up financial energy waiting to be released”.
That would mean a more productive environment for Lloyds earnings. And it could certainly boost the Lloyds share price. It could mean the UK housing market stabilises. If so, the bank could issue more mortgages and loans as people feel happier to spend freely to make up for lost time.
Lloyds finances
The bank’s most recent results from Q3 2020 show quite a rosy picture. Chief executive António Horta-Osório noted this. He said: “We have seen a significant change in financial performance with a return to profitability. I have great confidence in the future of the group and in its competitive position”.
Lloyds revealed pre-tax profits for the three months ending 30 September 2020 of £1bn, with a common equity tier one (CET1) ratio of 15.2%.
This latter point is very important. Since the banking collapse of 2008, all international banks have been forced to keep enough capital on hand to withstand severe financial stress. Since 2019, the minimum level has been a CET1 ratio of 4.5%. So I see it as positive for the Lloyds share price to see the bank dramatically exceed this level.
What’s next for Lloyds
As a long-term value investor, I’m not much concerned with day-to-day price movements, share chat bulletin boards, or screaming headlines. Value is what I seek. So does the Lloyds share price make it undervalued? Because that’s the point at which I’d buy in.
At today’s price-to-earnings ratio of just 10, I think Lloyds is undervalued. The bank nearly doubled its revenue from 2018 to 2019. And there are signs we could enter a rapid economic recovery in the late stages of 2021.
I’d suggest investors could be waiting for dividend income to be confirmed before buying in.
But I see it like this: while the Lloyds share price might be languishing now, that provides me with an opportunity. I like to look to the most likely future, and be greedy when others are fearful.
