I’ve been loading up on Lloyds (LSE: LLOY) shares, buying more every time the price dipped below 45p.
So far, I’ve had little reward. The Lloyds share price is down 8.67% over six months and is up just 4.96% over the year. That’s only slightly better than the FTSE 100 as a whole, which rose 3.63%.
That doesn’t worry me. I didn’t buy the bank to make an instant profit. I bought it to generate long-term income and growth. I will hold it to retirement and beyond if all goes well, although these things are never guaranteed. Even the safest stocks can come unstuck and, as we’ve seen this millennium, banks aren’t the safest.
It’s been looking like a bargain
I have been loading up on Lloyds shares for two reasons. First, they look at cheap trading at 6.1 times earnings. The price-to-book ratio is just 0.6, where a figure of one represents fair value. That gives me downside protection in case of further bad news, plus bags of recovery potential when the FTSE 100 finally rallies.
Second, Lloyds looks like one of the best dividend stocks on the lead index. Its current yield is 5.4%, covered three times by earnings. The forecast yield is 6.5%, with cover still generous at 2.7. While dividends are never guaranteed, I appear to have locked into a high and rising yield.
Yesterday, I finally enjoyed some reward, as the FTSE 100 enjoyed its best trading day since last November, up 1.83% on hopes that inflation will soon ease. My Lloyds shares jumped 2.66%. This bolsters my hopes that when the UK is over the worst of its inflation crisis and the next bull run begins, Lloyds will lead the charge.
It wasn’t the best performer on the FTSE 100 though. That honour goes to paper and packaging specialist Smurfit Kappa, which climbed 4.26%. Happily, I’ve been buying that too.
I don’t know when the rally will come
As a UK-focused loans and savings specialist, Lloyds’ fortunes rest on the UK economy. It has benefited from rising interest rates, widening margins by hiking rates on mortgage more than savings. This has triggered political controversy, but the big banks don’t seem to care. It’s the bottom line that counts.
Higher borrowing costs may also hurt Lloyds, as investors fear it could lead to a rise in debt impairments. Yesterday, the big UK banks came through annual Bank of England (BoE) year’s capital stress tests unscathed, further boosting confidence. The BoE confirmed that the banks have sufficient cash reserves to endure severe inflation, recession, unemployment and crash. Lloyds got a clean bill of health along with the rest.
Yesterday’s rally was fun, but I have no idea whether it will last. If it fades and the FTSE 100 stays low, that’s not the worst. My reinvested dividends will buy more Lloyds shares while they idle, and I might buy more myself. I’m hoping that when the FTSE 100 does enjoy a sustained bull run, my Lloyds shares will be right in the thick of it.
