Here’s why I think Lloyds shares are the best buy in the FTSE 100 now

So the UK stock market is falling, is it? I reckon that’s making Lloyds shares look like better long-term buys than ever.

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The Footsie is falling, yay! And Lloyds Banking Group (LSE: LLOY) shares are on the slide again, hurrah!

What am I talking about? Surely these are hard times now the FTSE 100 is in a new slump? I think quite the opposite, for a few reasons.

Volatility like this happens all the time. It’s an inevitable reaction to short-term economic news. Or political news. Or to no news at all, just the market getting jittery about nothing.

Interest rates

Right now, markets are worrying about interest rates staying higher for longer. That’s a genuine concern for people struggling to pay mortgages and bills, for sure.

Defaults would be bad news for Lloyds, the UK’s biggest mortgage lender. So maybe fears like that are behind the latest share price drop.

Lloyds shares reached above 54p in February. Since then, they’ve fallen by 12%. But I don’t think that’s due to any real analysis of the bank’s long-term outlook. That hasn’t changed, as far as I can see.

Bank sentiment

Barclays and NatWest have fallen too. So it’s surely got to be down to general market sentiment. When that turns down, bank shares can take the biggest kicking.

But interest rates will fall. And the UK will get back to growth. What will happen to bank shares then? If it’s anything like previous economic cycles, they could be in for a new bull run.

I want to get in while they’re cheap, like right now. It’s even better when my favourite shares are being unfairly hammered. I buy shares to hold for at least a decade, and I’ll use monthly ups and downs to my advantage.

Cheaper now

I already thought Lloyds shares were among the best value in the FTSE 100. But after these falls, the market puts them at only around half the average Footsie valuation. That just can’t be right.

The dividend yield suddenly looks better now too. Forecasts vary, but they indicate around 5% for 2023. And that’s in a tough year. Earnings are predicted to keep growing. And dividends are expected to reach 6.5% by 2025.

If we wait for the economic outlook to brighten, it could be too late to lock in yields like that. I’ll be buying more Lloyds shares just as soon as I save more cash.

Downside?

Now, of course, there are risks. Interest rates set to remain high for longer than feared? On the one hand, that would be good news for bank lending rates. But it certainly won’t help with the uptake of new mortgages.

I also reckon banking sector sentiment could remain poor for a while longer. The collapse of Silicon Valley Bank in the US is a painful reminder of bad times.

Buyback

But Lloyds just announced a £2bn share buyback, to return capital to shareholders. The board clearly thinks the shares are worth buying. I agree. And they must surely be better value now they’ve dipped again.

A big capital return like that also boosts my confidence in those long-term dividend prospects.

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.

Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. 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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