As 2023 drew to a close, the Lloyds (LSE: LLOY) share price looked like it was finally about to fulfil its massive potential. My own stake in the stock, which I bought on three occasions last year at around 45p per share, suddenly twitched and kicked into life.
It raced to the heady heights of 48.13p on 27 December and I braced myself for another lunatic surge in 2024. Instead it’s back down to 43.06p, as hopes of an early interest rate cut recede. Further confirmation for those who think Lloyds is a hopeless value trap.
I bought Lloyd shares because they were dirt cheap, trading at less than six times earnings, while offering a juicy yield of 5.5%. That’s forecast to rise to 6.43% for full-year 2023 and 6.99% in 2024. I told myself it’s worth buying purely for the income, but that’s not true. I want some share price growth as well.
This stock is stuck
Lloyds hasn’t delivered much of that for years. The share price is down 11.88% over one year and 24.39% over five.
This was easier to understand in the decade after the financial crisis, when management was trying to offload a bad bank and there was no dividend in sight. I assumed that when the clean-up operation was completed and Lloyd turned into the income machine of yore, its share price would fly. I was wrong.
Few complained when Lloyds ditched its riskier investment banking operations and overseas divisions to focus on the nuts of bolts of UK personal and small business banking. But it seems to have drained the life out of the share price. It’s still heavily traded by private investors, but the broader market doesn’t want to know.
One day this stock will fly
This is an issue across the banking sector, of course. All of the FTSE 100 banks are struggling, one way or another. Yet it’s particularly odd given that Lloyds now makes a whole heap of money, with pre–tax profits of £1.8bn in Q3.
That beat estimates and more than tripled last year’s £576m total, yet had zero positive impact on the share price. That’s despite the prospect of rising dividends and regular share buybacks.
One problem is that the bad news all too often cancels out the good. So while rising interest rates allow Lloyds to widen net interest margins, they also risk triggering more debt defaults among its customers.
There are occasional mutterings about a banking crisis, but the FTSE 100 banks have bags of capital strength and breeze through Bank of England stress tests. Lloyds is due a rerating, in my view, and there’s a chance we might get one this year, if inflation and interest rates head south, as I expect. If that doesn’t spark the stock into life, I don’t know what will.
The undervalued UK stock market is due some love, and so is Lloyds. Until that happy day arrives, I’ll keep re-investing my dividends and building my stake. Unmissable bargain or value trap? I’d say it’s the former and I’m willing to wait for it to prove me right.
