As the Lloyds share price rises, I’d still consider buying
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Lloyds (LSE: LLOY) shareholders have had a good week. The Lloyds share price moved up a few pence after a first-quarter trading update on Wednesday was well received by the City. It’s up 41% over the past year.
Here I’ll explain why the statement caused excitement and share what I plan to do next about the Lloyds share price.
Growth drivers for the Lloyds share price
There were several reasons the results went down well. Let’s focus on three. First, the company unwound some of its bad loan provisions from last year. This is money the bank had put aside in anticipation of possible borrower defaults. If it isn’t used, it can be unwound.
That’s like taking cash out of my wallet and putting it on the mantelpiece to pay a bill – only to discover that the bill is less than expected. I can put some of the cash back in my wallet.
Lloyds released £336m of such provisions. In the equivalent quarter last year, at the onset of the pandemic, it took a hit of £1.3bn making such provisions. I see this as good news for the share price as it suggests a more benign trading environment than the bank previously feared.
Profit jump
A second potential growth driver for the Lloyds share price from the statement was quarterly profit. That stood at close to £1.8bn before tax. That’s more-than-quadrupled from the same period last year, when profit stood at £400m.
It largely reflects the bad loan provision impact I discussed above. However, I see the headline profit as a possible growth driver for the shares.
It reminds investors that while Lloyds may be the only penny share in the FTSE 100, it is able to generate a profit on such a massive scale in a single quarter.
I think that reiterates a fundamental strength of the business. Its focused model of mainstream business and retail banking centred on the UK has a proven ability to turn profits.
Dividend prospects
A third positive aspect of the trading statement in my opinion was the company’s comment on dividends.
Lloyds said that it is “accruing dividends with intention to resume [a] progressive and sustainable ordinary dividend policy”. In other words, it has continued to save money while its dividend level is constrained by regulatory requirements. There is no guarantee, it could end up paying these excess funds out as a special dividend, but the news was still good on a “progressive” dividend payment. I like blue-chip shares with attractive dividend yields.
Lloyds share price risks
However, there are risks, even if the Lloyds share price seems attractive.
The dividends may not end up being progressive and there is no guarantee of future dividends at all. As we saw in the pandemic, the bank could be prohibited from paying dividends by its regulators.
The company’s fortunes are also closely tied to those of the UK economy. That could be a risk in the event of any economic downturn.
My Lloyds action plan
The trading statement highlights some of the reasons I think the company has a stronger future ahead and why I find the current Lloyds share price attractive. Plus, I still think its shares have further to rise.
More good news later in the year could drive the shares higher. I’m currently considering buying more Lloyds shares for my portfolio now.
christopherruane owns shares of 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.