The FTSE 100 index is dangerously close to the 7,000-mark right now. But since mid-2021, the Footsie has risen strongly every time it has touched or dropped below 7,000. And this could be the case with the latest mini-crash as well.
And I see this as an opportunity to pick up some bargains just before the bounceback. With the Lloyds (LSE:LLOY) share price on top of my watchlist, does the latest crash present a buying opportunity? Let’s find out.
Does the Lloyds share price offer value?
The banker is currently trading at 44p, with a price-to-earnings (P/E) ratio of just 5.4 times. And Lloyds shares come with a dividend yield of 5.8%, making it an incredibly undervalued penny stock on paper. Given its high year-on-year cash flow, the black horse bank could be a top passive income investment for my portfolio. But in the current economic climate, some analysts see the Lloyds share price as a value trap.
A value trap is any share that appears cheap but the long-term growth, industry health, and future returns do not meet expectations. And economic instability makes it a tough market for financial institutions to maintain a stable income. The national inflation rate touched a 40-year high of 9.1% today and the Bank of England expects inflation to hit 11% later this year. And this could trigger another hike in interest rates
But does this make the Lloyds shares a value trap? I don’t think so. Yes, interest rate hikes could deter individuals from borrowing. But it also means that Lloyds will earn a steeper interest on the loans it has already approved. Being the largest lender in the UK, Lloyds lent £16bn just to first-time homebuyers last year. Also, small and medium-sized businesses will be forced to borrow to keep inflation costs off consumers and retain market share.
And the board expects strong cash generation going forward, in line with the bank’s progressive dividend strategy. The focus on shareholder returns means I can expect a decent yield from the cash-rich banker. And using a dividend reinvestment strategy could generate long-term wealth for my portfolio. If I buy more Lloyds shares with every dividend payout, the returns over time could multiply.
Other factors to consider
Although I was optimistic about Lloyds’ decision to purchase housing real estate in the UK until recently, the latest developments show that the UK real estate market is finally slowing down.
The housing market is highly cyclical and periods of low customer activity last several years. Over the last couple of months, housing prices across the US, Canada, and New Zealand have started falling. Estimates suggest a 20% fall in prices in the UK by next year. This means smaller loan amounts and interest payments for UK’s largest housing mortgage lender.
However, the bank offers a robust dividend backed by a strong history of cash generation. And when the UK economy does recover, banking stocks could take off. This gives the Lloyds share price some growth potential as well. And given the high yield, Lloyds shares could become a strong cash generator for my portfolio. Given these factors, 44p does look like a strong bargain to me. But I’m tempted to wait to see if there is a further fall in share price before investing.
