At 44p, I think Lloyds (LSE:LLOY) shares look cheap. But are they?
After all, the stock has failed to deliver in the last five years, down by nearly 30%. And this year, it’s continued this trend, falling by over 5%.
Inflationary pressures have weighed down on Lloyds. And as central banks across the globe continue with their aggressive rate hiking cycles, investor confidence has been knocked.
More widely, the banking sector has experienced major volatility this year, epitomised by the collapse of Silicon Valley Bank.
However, I’m a Fool. And as such, I think Lloyds currently presents an opportunity.
Here’s why.
Passive income
My main attraction to Lloyds is the passive income opportunity it represents.
The stock currently offers a dividend yield of 5.6%, comfortably above the FTSE 100 average and a host of its competitors. And with inflation sitting at 7.9% for June in the UK, this seems like a smart way for me to put my money to work and hedge myself, to an extent, against amplified rates.
Of course, there’s the risk that this dividend could be cut. But with it covered over three times by earnings, I have a fairly high level of confidence in Lloyds paying out.
And the business also recently announced plans for a £2bn share buy-back scheme, which highlights the focus the business is placing on returning value to shareholders.
Strong results
Last week also saw the Black Horse Bank release its half-year results, which offered some reason for optimism. For the period, pre-tax profit rose nearly 25%, while net income also jumped 11% to £9.2bn.
Despite the uncertainty surrounding the UK economy, Lloyds has also benefited from rising interest rates. The first half of 2023 saw a 14% rise in underlying net interest income. On the back of this, Lloyds upgraded its guidance for the remainder of the year.
However, this doesn’t come without its side effects. And this was seen in the £662m impairment charge it recorded. In fairness, this doesn’t paint a full picture as it’s a reserve and some may be credited back. But it’s certainly a risk.
Future prospects
I also like the plans the firm is setting out for the future. Led by group CEO Charlie Nunn, the business aims to diversify its revenue streams in the years ahead.
This includes placing greater focus on business areas such as its rental venture, Citra Living. As part of this, it plans to have 10,000 homes in its portfolio by the end of 2025.
While this original target may prove to be optimistic, the firm is making headway, with its latest announcement revealing a further 700 properties it has in its pipeline.
A buying opportunity
So, at the current price, I think August presents a great buying opportunity.
A choppy UK economy may dampen the stock’s performance in the near term, but as a long-term investor, I like the look of Lloyds.
With strong growth prospects and with an added bonus of its sizeable yield, if I had some spare cash, I’d snap up some shares.
