When I last looked at Lloyds Banking Group (LSE: LLOY) in April, the Lloyds share price was about 44p. As I write today, it’s 11% higher, at 49p. Despite this continued growth, my view remains the same — I reckon this FTSE 100 stock could return to the 60p level seen at the start of last year.
I like Lloyds’ traditional banking model and its big market share. Although banks have had a difficult time over the last decade, I think most of these problems are now in the past. In my view, Lloyds’ shares could be a decent investment today.
Why Lloyds?
When it comes to investing, I’m a big believer in keeping it simple. If I can’t understand how a business makes money and what might go wrong, then I don’t want to invest. This is one reason why I like Lloyds. Despite its giant size, I think it’s quite a simple business.
There’s no investment banking or speculative trading at this bank. All Lloyds really does is lend money to real people (and businesses) and provide everyday banking services.
This traditional approach to banking seems to work quite well. Although loan losses rose last year due to the impact of the pandemic, the bank still accumulated surplus capital on its balance sheet. This is the cash the bank is allowed to use to fund dividend payments.
Lloyds’ costs are lower than most rivals, too. Wages and other operating costs accounted for 52% of Lloyds’ income during the first quarter. At Barclays, that figure was 61%, at NatWest it was 68%. All else being equal, that means less money is left over for shareholders.
Not a sure thing
Of course, banking is a cyclical industry. Although the Lloyds share price has risen pretty steadily since the start of this year, there’s no guarantee the bank’s progress will continue.
Although the outlook for the UK economy appears to be fairly good at the moment, I think it’s still much too soon to be sure how things will turn out as the pandemic recedes.
After an initial surge of pent-up activity, I wonder if we’ll see business activity slow down later this year. Unemployment might rise.
One particular risk, in my view, is that interest rates might start to rise. If that happened, I expect house prices to fall sharply, after so many years of ultra low mortgage rates. As the UK’s largest mortgage lender, that would affect Lloyds.
Lloyds share price: what I’d do
There are no risk-free investments. But I think Lloyds is a fairly safe way to get exposure to the UK economy with an attractive dividend income.
Broker forecasts suggest the bank will report an after-tax profit of £4.1bn this year and resume normal dividend payouts. These forecasts price the stock on 8.5 times forecast earnings, with a dividend yield of 3.8%.
I think this valuation looks attractive and don’t see any red flags that might put me off. I’d be happy to buy Lloyds shares at current levels.
