At present, Lloyds (LSE: LLOY) shares look like they could be a bargain buy with the opportunity to make decent returns. Despite this view from the surface, I want to dig a bit deeper and decide if I should buy or avoid the shares.
As I write, Lloyds shares currently trade for 46p. This is a 13% decline from early February, when they were trading for 53p. It is worth mentioning that on a 12-month basis, they are up 13% from 42p at this time last year.
Reasons to buy Lloyds shares
I noted the Lloyds share price earlier, and at present levels, the shares look cheap. They currently trade on a price-to-earnings ratio of 5.7.
In addition to Lloyds’ current valuation, there is an enticing passive income opportunity here. A dividend yield of just under 6% is hard to ignore. It is worth remembering the FTSE 100 average is between 3%-4%. Furthermore, Lloyds raised its annual dividend by 20% last year. The company’s forward-looking dividend is over 6%.
Next, Lloyds’ position as the UK’s largest mortgage lender is an envious one to be in. Possessing the command of a large market as a leader is advantageous — and could boost shares and returns, in my opinion.
Finally, taking a look at Lloyds’ most recent results, there is a lot to like for me. In its Q1 2023 results posted last week, Lloyds announced a pre-tax profit of £2.3bn. This profit smashed analysts’ predictions and was nearly 50% higher than the same period last year.
Reasons to avoid Lloyds shares
There are a few key bearish aspects when it comes to Lloyds that I must be aware of. To start with, a dividend is never guaranteed and can be cancelled at the discretion of the business to conserve cash in the face of headwinds.
This leads me on to my next point. The current economic outlook is bleak due to soaring inflation and high interest rates. With these two issues, come the looming spectre of rising default levels from mortgage customers, which could hurt financials, as well as shareholder returns.
Another issue I find with Lloyds is its lack of international exposure, compared to its other larger banking competitors such as HSBC and Barclays. Furthermore, the rise of challenger banks at the forefront of the digital revolution also threaten Lloyds’ market share and future earnings too.
What I’m doing now
After considering the pros and cons, I’ve decided I’m going to sit on the sidelines for now and keep Lloyds shares on my watchlist.
My decision ultimately stems from the fact that there are factors outside of Lloyds control that could dictate its fate including its share price and level of return. The biggest reason for me personally is the current economic outlook in the UK.
