Lloyds (LSE: LLOY) shares have looked like a dirt cheap no-brainer buy for a decade, but repeatedly failed to fulfill their potential. Now they’ve just suffered yet another false start. Is it time to give up on them?
When the price dipped to 45p last June I dived in and bought 4,403 shares for £2,000. I thought I’d bagged a bargain, only to see them get even cheaper.
On 8 September, I averaged down by investing another £2k, which bought me 4,856 shares at 40.9p each. Six days later I first received my first dividend. A whopping £40.34 that I automatically reinvested to buy 94 more shares at 42.7p.
Is this a value trap?
For a while, I was feeling smug. My only regret was that I didn’t have the cash to buy more Lloyds shares, but that’s life.
The FTSE 100 ended 2023 brightly, and so did Lloyds. Suddenly, I was up around £600 in total. I’d bought Lloyds on the assumption that its shares would recoup their lost value once it became clear that interest rates had peaked and the Bank of England would start cutting base rates.
That would knock savings rates and bond yields and make today’s 5.67% dividend yield look even more attractive.
Unfortunately, investors had got ahead of themselves. They ended the year anticipating a bumper six US interest rate cuts in 2024, and four in the UK, with the first landing as early as March.
Those assumptions now look overly optimistic, after UK consumer price inflation climbed slightly in December to 4%, while the US economy keeps bombing along, which suggests it’s too soon to cut rates.
Over the last month, Lloyds shares have fallen 11.98%. That’s a big drop for a supposedly solid FTSE 100 blue-chip. Rival banks weren’t hit as hard with Barclays down a modest 2.94% and NatWest Group dipping just 1.38% over the month.
Housing market worries
I’m now down a modest 2.03%, but investors who bought Lloyds more recently will have done worse. If I’d invested £4k into the shares one month ago, I’d have suffered a £479.20 paper loss. My £4,000 would be worth £3,521. Measured over 12 months, the shares are down 20.89%.
I can’t see any obvious reason for the quickfire drop. The long-awaited interest rate cut and subsequent stock market recovery may be on hold, but surely for just a few months. The only news of note I can find is the announcement that Lloyds is cutting 1,600 jobs as it continues to slim its branch network, but that would normally lift the stock rather than reduce it.
I can only assume it’s down to sentiment. As the UK’s biggest lender, Lloyds has more to gain when interest rates fall, and more to lose if they stay high. If that’s the case, they should go on a tear when the Bank of England finally turns dovish. We got a glimpse of that in December. That’s what I’m banking on but who knows with Lloyds?
So I may have walked straight into the UK’s biggest value trap but with luck I should get a plenty of dividends, with Lloyds forecast to yield 6.6% in full-year 2023 year and 7.16% in 2024. Even a modest share price uplift would look rewarding on top of that, so I’m happy to sit on my shares and wait. And wait.
