Why the current Lloyds share price may be a slam-dunk buy

The Lloyds share price has fallen in recent weeks, and Andrew Woods explains why he thinks the stock might be good value.

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I’ve kept an eye on the Lloyds (LSE:LLOY) share price for quite some time now. As we’re in a trend of rising interest rates, I wonder whether now could be the time to add the stock to my portfolio. Could it stand to benefit over the long term? Let’s take a closer look. 

Rising interest rates

The shares have generally moved with the broader stock market, continuing to slide. In the past week, they’re down 6.5% and currently trade at 43p.

Although the share price has been falling, the firm – a FTSE 100 banking business – has been benefiting from a climate of higher interest rates. 

In the UK, these are now set at 2.25%. This means that the company can charge its customers more when they borrow money. Customers usually do this in the form of loans and mortgages, and Lloyds is one of the largest players in the mortgage market. 

While this has brought the business rising profits and broader net interest margins, rising rates may be a double-edged sword.   

Potential customers may be put off taking on more debt as inflation continues at pace and energy bills climb. 

This tough economic climate may also affect existing customers, who could eventually default on loans. This would obviously be bad news for the company.

A bargain?

Yet while there are obvious risks facing Lloyds, it has already shown that it can convert higher interest rates into profits on balance sheets. 

These rates also show no signs of slowing, and Citi has forecast that inflation could reach 18% in the UK by the beginning of 2023. If this forecast turns out to be accurate, the Bank of England will likely maintain rate hikes for the foreseeable future.

This may continue to bolster the company’s future results. 

The business also has an attractive dividend yield of over 5%. While this isn’t the highest on the market, it’s certainly competitive. It’s good to know that I could derive income from an investment in the firm, besides potential value. 

There’s another reason why Lloyds shares are appealing to me at the moment. This is that its price-to-earnings (P/E) ratio is lower than the average of its competitors. The P/E ratio essentially measures the current share price compared to its earnings per share. 

The Lloyds P/E ratio sits just under 7. The average of the UK banking sector is around 10, indicating that I may be getting a bargain if I buy the shares soon.

Interest rates are rising and overall, I see this benefiting the company. While there are some risks that could arise in the future, I think the rewards could outweigh them. To that end, I’ll buy the shares soon to hopefully pick up a bargain.

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 assessed. Consider taking independent financial advice.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Andrew Woods has no position in any of the shares 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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