The last month or so has seen Lloyds (LSE: LLOY) shares rally. Up around 9%, this has reversed some of the losses the stock has seen in 2022.
The shares have been hit this year with factors such as red-hot inflation weighing down investor sentiment. However, I think 2023 could be the year to buy. Here’s why.
Lloyds share price history
The last five years have been bleak for shareholders in Lloyds. Within this time, the stock has fallen around 30%, including a 42% fall in 2020 alone.
This year has told a similar tale. With inflation reaching 11.1% for October, investor confidence has plummeted. After falling below the 50p mark back in February, the Lloyds share price has failed to rise above it since. As we head into 2023, Lloyds investors will be hoping for a turnaround in fortunes.
Where next?
So, where does the stock go from here?
Let’s start by getting the potential headwinds out of the way. Firstly, we’re in a recession. And with Lloyds focusing on the domestic market, this makes it more vulnerable to the impacts of a weakening UK economy.
As one of the UK’s largest mortgage lenders, the weak property market will also have an adverse effect on Lloyds. With UK house prices predicted to fall 9% between now and autumn 2024, people may be deterred from buying new homes.
Not all down and out
Despite this, I think there are plenty of reasons to like Lloyds shares.
In the short term, Lloyds is set to benefit from higher interest rates. To curb inflation, the Bank of England has been hiking rates in recent times. Currently, the rate sits at 3%. And with predictions that the base rate could rise above 4% in 2023, this is a positive for Lloyds.
This is because higher rates allow the firm to charge customers more when they borrow from the bank. As a result of this, Lloyds saw its underlying net income up 15% in Q3, driven by growth in its net interest margin.
What I also like about the stock is its attractive dividend yield. This currently sits at around 4.6%. And while this isn’t inflation-beating, it does trump the FTSE 100 average. With high inflation, the passive income stream created from this investment could come in handy in the months ahead.
Lloyds also has a low valuation. With a price-to-earnings (P/E) ratio of 7.7, this sits well within the ‘benchmark’ 10 and highlights to me that the stock is undervalued. On top of this, it also has a forward P/E of 6.1.
While the bank could suffer as a result of an underperforming housing market, this could be offset by the moves it’s taken in the private rental market. Through the brand Citra Living, Lloyds plans to buy 50,000 homes by 2030.
Time to buy?
So, are Lloyds shares a buy? I’d say yes.
The stock will face headwinds in the short term. However, I see long-term potential. The rise we’re set to see in interest rates will benefit the firm. And its venture into the rental market looks promising. Its dividend yield and low valuation are a bonus. If I have some spare cash, I intend to buy Lloyds shares as we head into the New Year.
