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2 UK penny stocks to buy in August

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British Pennies on a Pound Note
Image source: Getty Images

With many traders away on holiday, August can be a quiet time in the stock market. However, deals are still being done and shares continue to change hands as investors like me look for bargains. I’ve been hunting for value in the stock market and here are two penny stocks I would consider buying for my portfolio.

UK penny stocks: my picks

First on my list would be a share many people might be surprised to learn is a penny stock. High street bank Lloyds (LSE: LLOY) is the country’s biggest mortgage lender, but it also sits among UK penny stocks. Its upward trendline started to move downwards a couple of months ago. But it is still 63% higher than a year ago. At 46p, I would consider adding more Lloyds shares to my portfolio.

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Last month the bank issued its interim results. These didn’t seem to generate much enthusiasm in the City and the Lloyds share price has been drifting around in a fairly limited trading range ever since. But I thought the results bolstered the Lloyds investment case. After tax, it earned £3.9bn in the first half. That equates to earnings per share of 5.1p. That’s just for six months, but is already more than one tenth of the current share price. That valuation seems cheap to me.

UK dividend stocks

The good news from Lloyds wasn’t just about the overall business performance. The bank also announced that it would pay an interim dividend of 0.67p. Before the pandemic, Lloyds was paying out a final dividend roughly twice the interim dividend. It hasn’t said that it will do that this year, but if it does, the prospective yield at the current Lloyds share price is around 4.4%. I find that attractive.

There are still risks to consider. While the economy seems to be recovering well, if it starts to stutter, bad loans could increase. Rising defaults would eat into Lloyds’ profits.

Photo-Me

In March, I picked Photo-Me (LSE: PHTM) as my share of the month. The shares have added 57% since that article was published. But they still rank among UK penny stocks – and I would consider buying them now, even after the price rise.

The company has been rapidly expanding its self-service launderettes. But its photobooth business has also been staging a recovery. In a trading update this week, Photo-Me said that the overall performance in the past three months was better than expected and pinned the outperformance on this segment doing better than it had predicted, especially in Central Europe. The company has raised its expectation of pre-tax profit before exceptional items to £25m-£30m for this year. That’s around a tenth of its market cap, which sits a bit below £300m.

Risks remain though, including the capital expenditure required to modernise and change the company’s estate of vending machines to match current customer needs. Lockdowns and other restrictions also eat into the company revenues as they lead to fewer customers in the areas where most Photo-Me machines are located. Any Covid surge could therefore be a problem for it.

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Christopher Ruane owns shares 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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