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7 things I need to know before buying Lloyds shares

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Lloyds Banking Group (LSE:LLOY) is regularly in the top five most traded stocks in the FTSE 100. Over the past year, the bias has been more in favour of buying Lloyds shares. The share price is up almost 80% over a one-year period. However, it has stalled in the past three months, only up 4%. I don’t currently own shares, and need to think on the below points before making a call.

Points I need to consider

  1. Lloyds shares pay out a dividend. This means that if I hold onto the shares for a long enough period, I’ll receive the dividend payments when they fall due in the future. The dividend was cut for a period of time last year, but has now been reinstated. At the moment, the dividend yield on the stock is 2.56%.
  2. Movement in the share price is partly determined by the state of the UK economy. Since the bank mostly services a UK retail client base, the performance of the broader economy impacts the share price. During periods of increased economic activity, the share price should rise in value.
  3. The pandemic wasn’t too bad for the bank. Initially, large amounts of money was set aside to cover for potential credit defaults. For example, Q1 2020 saw a net impairment credit of £1.4bn. The same quarter in 2021 had a smaller £323m charge.
  4. The future pandemic impact is uncertain for Lloyds shares. In several trading updates, the bank has commented that it’s unclear just how much negative impact it could have on the revenue and profits going forward. If we’re honest, I don’t think any of us have a clear picture at this stage either!
  5. Lloyds is pushing to become more digital and flexible. For example, with the introduction of the new £100 contactless spending limit, Lloyds is one of the few banks that will let customers personalise their own spending limit. This, along with other heavy investment into digital transformation, is one of the key focuses for the bank looking forward.
  6. Higher interest rates should help the Lloyds share price move higher. It looks like the Bank of England will be raising interest rates at some point within the next year. This should help Lloyds as it gives a larger margin between the rate at which it can lend funds out versus the rate it has to pay on deposits. So unlike other FTSE 100 stocks, higher rates should be beneficial for the company.
  7. There could be upcoming volatility with Q3 results due out at the end of this month. This will make interesting reading, given that it was a quarter without any real trading restrictions. Depending on how the results come out will dictate the direction for the Lloyds share price.

Would I buy Lloyds shares now?

Fundamentally, I think that Lloyds shares do look undervalued when I look at its price-to-earnings ratio below 10 and high earnings yield. Yet given the lack of movement recently, I think that there are potentially more exciting stocks to buy right now, so I wouldn’t buy Lloyds shares. One example is NatWest, which I talk about here.

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jonathansmith1 has no position in any share mentioned. 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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