Should I invest in Lloyds now as its share price dips?

The Lloyds share price is currently undergoing a dip, but would I buy stock following its rapid rise this year?

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The Lloyds (LSE: LLOY) share price has risen approximately 40% in the past 12 months, from 30p to 42p. However, its rise came to a halt this week, with the stock down almost 4% from 44p since Monday.

So, I’m wondering if this recent dip from Lloyds provides me with a good buying opportunity, or if it’s just a blip?

A look at its financials

Lloyds had a poor 2020 as profits fell 70% year-on-year to £1.2bn. I believe this was to be expected, especially at a time of ultra-low interest rates. Lloyds generates revenue by taking deposits and lending funds. Low interest rates mean lower returns.

The British banking giant still had plenty of cash on hand to weather increased pandemic costs. For the quarter ending September 30, 2020, Lloyds held more than £200bn, a 30% increase year-on-year. Its tier 1 capital ratio — the ratio of Lloyds’ total equity capital to its total risk-weighted assets — was a healthy 15.2% at the end of its last fiscal year.

Why is the Lloyds share price dipping?

So why is the share price weakening? A potential reason could be Lloyds’ final dividend payment on 15 May. The company went through its ex-dividend date last week on April 15. This means that any Lloyds investors who bought the stock after this are not entitled to the bank’s final dividend payment of 0.57p per share. In my Lloyds article published last week, I mentioned that some volatility could follow.

Another reason could be due to renewed concerns over the fragility of the British economy as we come out of this pandemic. As one of the country’s largest lenders, Lloyds’ stock tends to move in tandem with the UK economic outlook. 

Growth potential

There’s still plenty of bite left in Lloyds Banking Group. The UK banking leader’s open mortgage book grew by £7.2bn in the year. I’m optimistic about this for a number of reasons.

Lloyds is a UK-focused bank now, and domestic mortgages are especially important. Knowing that this important part of its business is growing is a good sign for me. Thankfully, fears that the pandemic would collapse the housing market have not come to pass so far. In fact, we’ve actually seen shares in Britain’s top builders strengthening in 2021 alongside the Lloyds share price.

I also enjoyed seeing customer deposits up by £39bn, with a loan-to-deposit ratio of 98%. Paired with strong liquidity measures, I can’t see Lloyds having cash flow problems at all. And that, I hope, can boost this FTSE 100 company’s share price in the coming years.

My one concern about Lloyds’ share price

My biggest concern about investing in Lloyds right now is the average British person’s savings. By the end of 2020, average savings had increased 25% to 15.6% of disposable income. This savings glut will add £180bn to UK household savings in the five quarters to June 2021. But this wave of deposits isn’t good news for banks, which will struggle to lend people money profitably. Britain’s new-found love of saving could actually drag on the Lloyds share price.

So, should I buy?

I would like to see the economy return to more normality before making a decision about Lloyds’ growth potential. Should its share price fall further, I may reconsider, but for now, I’ll be waiting for better results.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jamie Adams holds no position in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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