Down 10% this year, Lloyds (LSE: LLOY) shares are still well below their pre-pandemic highs. However, I’m increasingly optimistic that the share price could rise significantly from today’s level of 45p. Hot off the back of encouraging first half-year results, I’m using some spare cash to add to my position in the black horse bank.
Let’s explore why Lloyds is one of my favourite FTSE 100 stocks to buy today.
Upgraded profitability and dividend forecasts
During H1 2022, Lloyds demonstrated strong momentum across a range of financial metrics. Net income of £8.5bn represented a rise of 12% compared to the same period last year. What’s more, the bank’s net interest margin (a key profitability indicator) reached 2.87% in Q2, marking a substantial jump from the year before. The group now expects this figure to be in excess of 2.8% for 2022 as a whole.
The UK’s largest mortgage lender also lifted interim dividends by 20% to 0.8p per share — its largest payout since 2019. The stock currently yields an index-beating 4.72%. City forecasts suggest the dividend yield will rise into 2023 and 2024, which is great news for me as a passive income investor.
I think these are impressive numbers, particularly in the context of an increasingly gloomy macroeconomic outlook. Moreover, the results come a time when notable competitors are mired in difficulties.
HSBC is currently battling a break-up campaign spearheaded by a major shareholder, Chinese company Ping An Insurance. Meanwhile, Barclays recently fell short of analysts’ consensus profit forecast with a 40% slump in pre-tax profits due to an expensive US trading blunder. Accordingly, Lloyds is quickly cementing its position as my first choice Footsie banking stock to invest in.
Not without risks
Admittedly, it revealed a 6% decline in pre-tax profit to £3.66bn, down from £3.91bn in H1 2021. The primary reason for this was the impact of a £377m impairment charge. The group has set aside the sum to cover a possible increase in loan defaults as the cost-of-living crisis intensifies.
Indeed, the squeeze on household budgets and potential knock-on effects on debt obligations owed to the bank represent risks for the Lloyds share price. Chief Executive Charlie Nunn estimates 20% of customers are being forced to adapt their spending significantly. To add further colour to the picture, the average British family is facing an £89 per month hike in food and energy bills compared to 2019 and around 1% of customers are “really struggling to make ends meet“, in Nunn’s words.
An inflation play
As Thomas Jefferson once said, “with great risk comes great reward“. The Bank of England’s recent dire prognosis for UK economic growth and inflation is certainly laden with risks for UK stocks across the board, as well as for cash lying idle in low-interest savings accounts. With no easy options, I’m doubling down on Lloyds shares in this challenging environment.
Generally, banking stocks tend to outperform during periods of aggressive monetary tightening while other companies might struggle. I’m optimistic this investing maxim will prove true in Lloyds’ case. In particular, solid financial results married with a low price-to-earnings ratio under 7.5 give me confidence that the stock’s a value buy for my portfolio at 45p.
