Are Lloyds shares a no-brainer buy at 42p?

Lloyds shares have given up their early 2022 gains and have plunged again. How resilient will the bank be in the face of growing economic pressure?

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Buying dividend stocks while they’re cheap is a key part of my investing strategy. That’s why I invested in Lloyds Banking Group (LSE: LLOY), and I’ve already had some handy income from them. And with Lloyds shares now down as low as 42p, I’m thinking of topping up.

I have money ready to invest, and my question is whether there’s anything out there that I like better. Today I’m examining the case for Lloyds.

Firstly, just look at what’s happened to the share price this year:

The shares had started to pick up early in the year. But the latest economic woes have put the dampers on, and we’re now looking at a 12% fall over the past 12 months.

The first thing I’m looking at is valuation. There’s a strong possibility of profits falling in 2022. But on 2021 earnings, Lloyds shares are on a trailing price-to-earnings ratio of only 5.6. Even if earnings in 2022 take a hit, I still see a safety margin in that valuation.

The dividend

The key is surely the dividend. Last year’s 2p per share would yield 4.7% on the current Lloyds share price. The dividend could come under pressure this year. But with 3.75 times cover by earnings in 2021, again I see room for safety.

There’s another thing that makes me see a good chance of Lloyds’ dividend being maintained this year. The bank is currently on a share buyback programme, returning up to £2bn to shareholders by that route. So there’s cash to hand back.

At 31 December 2021, Lloyds reported net tangible asset value per share of 57.5p. The shares currently trade at a discount of 28% to that, which I see as cheap. We have no idea yet of what 2022 will do to Lloyds’ asset values, though. But this is the third measure where I think I see a safety buffer.

Latest update

These figures are based on old results, but Lloyds’ Q1 update has updated things a little. The quarter brought in a 17.5% fall in profit before tax. But that was down to an impairment charge based on the declining economic outlook. In Q1 2021, the bank had recorded a net credit.

Net interest income increased by 10%, so at least rising interest rates are helping someone if not borrowers. Operating expenses fell a little, and total assets grew 5%.

Again, figures like these quickly become out of date. We have to wait until 27 July for a first-half report, and that will surely offer crucial information for Lloyds shareholders.

Changing outlook?

For me, the biggest risk is that we’ll see a reversal of the upbeat outlook that characterised the first quarter. If we see inflation really starting to bite, with, for example, loans and mortgages starting to dip, the Lloyds share price could fall even further.

And updates on the bank’s dividend policy would be of great importance too. Anything less than confident, there could be bad news.

So what’s my bottom line? I’m looking carefully at other investment options. But unless I find something I think is a better bargain, I think I’m going to buy more Lloyds shares.

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 considered so you should consider taking independent financial advice.

Alan Oscroft has positions 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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