Not again! Lloyds Banking Group (LSE: LLOY) investors have seen several share price slumps over the last year.
The FTSE 100 bank’s shares are down another 10% over the last month, but I don’t think there’s any reason to panic. Indeed, I’m still bullish on this high street stalwart.
I reckon Lloyds’ current sub-50p share price could be a good opportunity to lock in a 6% dividend yield for years to come. Here’s why.
It’s cheap!
Lloyds shares currently trade nearly 10% below their tangible book value and offer a forecast dividend yield of 6.2%. Broker earnings forecasts for this year suggest the shares are trading on just six times expected 2023 earnings.
All these valuation metrics look cheap to me, especially as I believe the bank’s balance sheet provides comfortable support for the forecast dividend of 2.8p.
Without getting into too much technical detail, my sums suggest Lloyds already has £1.3bn of surplus capital (2p per share) it can return to shareholders, even without any contribution from this year’s profits.
What could go wrong?
If things are so good, why have the shares been falling?
Lloyds only operates in the UK and is a pure retail bank. It’s the UK’s largest mortgage lender and is exposed to both consumer and business lending and credit cards.
If the UK economy falls into a recession, Lloyds is likely to see an increase in bad debt and a slowdown in new lending. Both of these could hit profits.
I can also see another risk. Interest rates have risen to more than 4% this year and lenders have been quick to increase the rates they charge on loans and mortgages. But big banks like Lloyds have been slow to pass on higher interest rates to savers.
As I write, Lloyds standard easy access cash ISA offers a rate of just 0.85% on balances under £25,000. That’s very poor. I’m getting over 3% elsewhere.
Lloyds and its peers rely on customer inertia — people just don’t want to keep moving their savings. However, this issue is getting a higher profile now and I think UK banks will have to start paying higher rates over the coming year. If I’m right, this could put some pressure on the bank’s profit margins.
I’d buy Lloyds
I already own a bank stock in my portfolio and I’m not looking for more. But if I was, I’d definitely consider Lloyds.
So far, bad debt levels are still very low. Higher interest rates have boosted the bank’s profitability, as well. I expect this to continue, even if savings rates rise.
Lloyds’ 6% dividend yield also looks very safe to me. This year’s payout is expected to be covered 2.7 times by earnings, in addition to the surplus capital I mentioned earlier.
For investors looking for reliable high-yield income from a FTSE 100 share, I think Lloyds shares are a good buy at 45p.
