The world is full of wonders and here’s one – Lloyds (LSE: LLOY) shares are actually rising. It’s a rarely witnessed event, as today’s price of 47.6p is 38.4% lower than a decade ago. The stock traded at 77.31p in December 2013.
I’m thrilled because over the summer I made a habit of buying Lloyds shares whenever they dipped below 45p. It was a trigger level for me.
How could I resist, with Lloyds Banking Group trading at less than six times earnings, while yielding around 5.5%? I kept buying even when I was in the red and now I’m comfortably in the black with the share price up 11.78% over the last month.
Bad to good
Lloyds shares have been lifted by hopes that interest rates have peaked and the Bank of England will start cutting next year. Markets reckon today’s base rate of 5.25% could have slipped a full percentage point to 4.25% this time next year. Mortgage rates are already falling in anticipation, easing the pressure on homeowners whose ultra-low fixed rates are due to expire in the months ahead.
This will underpin house prices, keep a lid on mortgage arrears and reduce the number of costly repossessions. That’s all good news for Halifax owner Lloyds, which is the UK’s biggest mortgage lender, even if it does squeeze net interest margins.
Despite the jump, Lloyds shares are up just 3.41% over the year. They trade at just 6.4 times earnings, which looks cheap as chips to me. Its price-to-book ratio is just 0.6, where a figure of one is seen as fair value, offering further comfort.
The yield has inevitably fallen as the share price has climbed, but it’s still a meaty 5.1%, covered exactly three times by earnings. That offers plenty of scope for dividend growth, and markets expect the yield to hit 5.9% in 2023, with cover still generous at 2.7. In 2024, investors can expect income of 6.49%. This will look even better as bond yields and savings rates decline.
I’m a happy investor
I’m thrilled to have locked into a high and rising income at a low, low price. Dividends are never guaranteed but this one looks solid and I plan to keep reinvesting mine for years, to build my stake in the stock.
I don’t expect Lloyds shares to shoot the lights out. The bank may be highly profitable, making £6.9bn in 2022, but the financial crisis clipped its wings. Now it sticks to the basics of small business and personal banking. Buying when it’s super-cheap gives scope for some share price upside at least.
I’d love the Lloyds share price to keep climbing through December and beyond, but I’m not banking on it. Markets may have raced ahead of themselves by anticipating an early base rate cut, as BoE governor Andrew Bailey keeps warning. While we should avoid a house price crash, next year should be bumpy as two thirds of the impact of rising interest rates have yet to feed through to borrowers.
That’s fine by me. My reinvested dividends will pick up more stock while the share price is down. Plus it gives me a chance to buy more Lloyds shares. They still look great value to me.
