Lloyds (LSE: LLOY) shares are a conundrum. They’ve looked incredibly good value for years, yet have repeatedly failed to explode into life.
The stock has fallen 28.1% over the last five years, and has risen just 1.24% over the last 12 months. Despite the long-term lack of growth, I still bought them last Thursday.
As investors fretted over the US debt ceiling and the FTSE 100 fell, I seized the moment and bought 4,403 Lloyds shares for £2,000 at 44.71p per share.
I might have invested more, but I already owned shares in Lloyds, having previously bought them last November for 44.75p.
Pull the trigger
I’m taken by how similar those two prices are. It wasn’t planned. Clearly, I’m triggered by seeing Lloyds shares trading below 45p. However, I won’t be buying any more. Now it’s time to sit back and see whether I have bought into a terrific income and growth machine, or fallen into a frustrating value trap.
Today, Lloyds looks incredible value with its shares trading at just 6.2 times earnings, making them among the cheapest on the FTSE 100. The price-to-book value is 0.6, comfortably below the figure of 1 that represents fair value.
That seems unmissably cheap for a company that recently posted a 46% increase in first-quarter pre-tax profit to £2.26bn, smashing analyst forecasts of £1.95bn. Especially since Lloyds made it through the recent banking panic largely unscathed.
Sometimes I struggle to work out exactly why investors dislike Lloyds. Is it because growth prospects are limited? That’s undeniably true, they are. Lloyds now shuns high-risk investment banking activities in favour of boring everyday savings and loans for consumers and businesses. That’s a shame, but we all know why.
I’m taking my time
At the same time, I think that makes now a good time to buy it. If share price growth is going to be difficult to achieve, it’s better to buy a stock when it looks cheap. At least that gives some scope for a rebound.
In practice, I bought Lloyds shares for income rather than growth. They are forecast to yield a handsome 6.2% this year. The payout is nicely covered 2.7 times by earnings, which gives plenty of scope for management to increase shareholder payouts in future.
I plan to hold onto my Lloyds shares for years and hopefully decades. In that time I will continue to reinvest my dividends until I finally need to take them as income to top up my State Pension. Over such a lengthy period, with luck, my holding will compound and grow. And if the shares do get a share price of spurt or two, I’ll treat that as a bonus.
Dividends are never guaranteed. If the UK economy tanks and Lloyd suffers a string of debt impairments, cash flows could falter and the dividend could be cut. However, my long-term investment horizons give it plenty of time to recover.
Today, I’m happy with my sub-45p entry price. Fingers crossed, one day it will look even cheaper.
