During the global financial crisis of 2007-09, several British banks collapsed, while others teetered on the brink. Leading lenders — including the Lloyds Banking Group (LSE: LLOY) share price — plunged to record lows.
Over the following years, bank shares recovered, but never returned to their former highs. For much of the past decade, I avoided investing in financial stocks, scared off by weak balance sheets and previous bad behaviour.
The price looks range-bound
Looking at the five-year chart for the Black Horse bank’s stock, it’s hasn’t exceeded 65p since December 2019. And during 2020-21’s Covid-19 crisis, stock markets crashed, taking financial shares down. I wish I’d bought Lloyds shares at under 25p in September 2020.
Eventually, the stock appeared a value play to me, so my wife and I bought at 43.5p a share in June 2022. Initially, I was pleased with our purchase, with the price leaping to 54.33p by 9 February 2023.
Alas, that proved to be high for this year. Soon afterwards, a US banking crisis hammered financial stocks. And with UK economic growth slowing, the Lloyds share price hit its 2023 low of 39.42p on 24 October.
A dividend dynamo
In the last trading session before Christmas, it closed at 48.05p on Friday, 22 December. This values the entire business at £30.5bn — a modest price tag, in my view.
Today, my wife and I have made a paper gain of 10.6% since our mid-2022 purchase. Then again, we bought Lloyds stock for its ability to generate market-beating dividends for years to come.
Currently, Lloyds shares trade on 8.6 times earnings, producing an earnings yield of 11.6%. This means that their cash yield of 5.3% a year is covered a solid 2.2 times by historic earnings.
Furthermore, thanks to its retained profits, the bank has billions of pounds of spare capital on its balance sheet. In time, I expect this to be returned to shareholders via share buybacks and rising dividends. This motivates me to hang on tightly to our stake.
A solid bet on recovery?
Lloyds shares are said to be the most widely held and actively traded London stock. Yet they’ve not made any ground in recent years, rising 3.9% over one year, but losing 6.2% over five (excluding dividends).
That said, many investors see the bank as a bellwether for the UK economy. Thus, when Britain booms, this rising tide could lift Lloyds shares. Also, lacking an investment bank, I see the group as a pure play on UK interest rates and credit growth.
For example, let’s say inflation stays stubbornly high in 2024, preventing the Bank of England from lowering interest rates. This should boost Lloyds’ net income margin — the profits it makes on loans minus what it pays out on savings.
Also, what if the economy doesn’t fall into recession in 2024, but instead turns the corner and grows? This could mean higher revenues from lending growth, plus lower bad debts and loan losses. Again, this would be good news for British banks.
Of course, things could swing the other way, with economic weakness squeezing consumers even harder. This might mean lower revenues, earnings and cash flow for banks. Even so, I regard the Lloyds share price as an exciting recovery play for 2024-25 and worthy of consideration for investors!
