Everyone seems to have their own view on the Lloyds (LSE: LLOY) share price.
Is it a great buying opportunity as macroeconomic volatility continues to hurt banking shares that could eventually mount a turnaround? Or is it one to avoid given insurmountable issues ahead?
Here’s my view!
Challenges ahead and bullish traits
Lloyds shares haven’t exactly set the world alight in recent years. Over a 12-month period, they’re down 22%, from 53p at this time last year to current levels of 41p.
Looking back further, over a five-year period they’re down 26%, from 56p to current levels. I’d argue they’ve never really recovered from the financial crash of 2008.
However, there are some bullish aspects about Lloyds that I find myself drawn to. To start with, its position as the UK’s largest mortgage lender can’t be ignored. Plus, it is getting into the build-to-rent market, which could offer it a whole new revenue stream, and push the shares up in the longer term. The rental market is burgeoning at present, and this could continue due to the current economic turbulence.
Moving on, the shares look dirt-cheap on a price-to-earnings ratio of six. This doesn’t look like it will increase much for the following couple of years, based on forecasts.
Finally, a dividend yield of close to 6% is very attractive. This is higher than the FTSE 100 average of 3.8%. However, it’s worth noting that dividends are never guaranteed.
From a bearish perspective, there’s a reason the P/E ratio may not rise or the shares may not climb for a couple of years. Economic turbulence made up of higher interest rates and soaring inflation have caused a weaker property market. Plus the current housing shortage in the UK could hurt performance and investment viability, at least in the short to medium term, in my view.
Rising interest rates helped boost performance but also massively increased the risk of loan impairments. In fact, Lloyds set aside money for this but the numbers just seem to be increasing. In the nine months to September 2023, Lloyds recorded impairments of £849m. The figure for 2022 came in at £1.51bn. If interest rates don’t come down soon, this number could continue to rise. Lloyds’s next set of results are due later this month and should reveal more.
Furthermore, with higher rates and inflation causing a cost-of-living crisis, people are finding it much harder to buy homes. This could dent performance as new business levels could drop.
My verdict
Weighing the pros and cons, I do think that the Lloyds share price presents an opportunity at current levels.
I would quickly caveat this by saying I’d be willing to endure some short-term pain for longer-term returns and growth. This is primarily because the economic picture is still uncertain. Those with a lower tolerance for volatility may consider Lloyds a stock to avoid.
Personally, I’d be willing to buy Lloyds shares as soon as I have some spare cash. A great market position, a potential additional revenue stream with its build-to-let plans, and a relatively safe looking passive income opportunity have helped me come to my conclusion.
