Lloyds (LSE: LLOY) shares have struggled so far in 2022, falling into the same bearish spiral experienced by most of the stock market. Year to date the shares are down 8%. This has largely been due to the economic backdrop. Rising interest rates and inflation have created a tough macroeconomic environment for stocks. That being said, Lloyds is actually up 4% over the last 12 months. So, is now the time to add this FTSE 100 stock to my portfolio? Let’s take a closer look.
The double-edged sword
It’s no secret that inflation has been wreaking havoc with markets in 2022. The pandemic is partly to blame for this as huge government stimulus coupled with supply shortages sent prices skyrocketing. Then rising energy prices from the Russia-Ukraine conflict sent inflation soaring across the globe again. In fact, in the UK and US, prices rose by 10.1% and 8.7% in June 2022.
The way that central banks are fighting this is by raising interest rates. When rates rise, people spend less, and economic growth slows. This is usually bad news for the stock market as it means people are less likely to invest in markets. Evidently, this is bad news for Lloyds shares. In addition to this, it means that people are less likely to take out loans, as they’re being charged more in interest on those loans.
However, the flip side of this argument is that when loans are taken out, Lloyds can charge more on them, hence increasing its own top line. Lloyds is already the UK’s largest mortgage lender and hence is in a good position to reap the benefits of hiked rates.
A good value stock?
A big part of why I like the look of Lloyds shares is due to their meaty 4.7% dividend. With inflation on the rise, stagnant money is losing value. The Lloyds dividend can help me mitigate this risk. In addition to this, with a 7.5 price-to-earnings ratio, the shares look cheap to me at 45p. Competitors HSBC and NatWest trade with P/E ratios of 9.6 and 10.5, which shows me that Lloyds shares are slightly undervalued compared to its market.
The stock may be good value, but this doesn’t mean that it’s recession-proof. With rates still on the rise, there’s serious talk of the UK entering a recession by the end of 2022. Lloyds has struggled during crisis times, and its share price has never fully recovered from 2008. This factor could hold the stock back throughout the rest of the year and beyond.
The verdict
So at 45p, are Lloyds shares a buy? I reckon so. The stock looks cheap to me, and the healthy dividend is always a bonus. Rising rates do pose a threat, but the financial sector is in a favourable position to manage this risk. Therefore, I’m looking at adding a Lloyds position to my portfolio in the near future.
