Just because a stock looks cheap doesn’t necessarily make it good value, as the Lloyds (LSE: LLOY) share price makes abundantly clear. It’s looked like a bargain for years, but steadfastly refuses to recover.
Lloyds shares have crashed 22.39% over 12 months and 28.82% over five years. Barring the occasional spike, the long-term trajectory has been downwards for the last decade. This is a period when the stock should have been climbing, as it cleared up the mess left by the financial crisis and reinstated its dividend.
Today though, it’s an undeniably brilliant income play. Lloyds shares are forecast to yield 6.7% in full-year 2023, which should rise to 7.32% in 2024. I’ve included both figures, because the increase is important. That gives investors like me access to a rising income over time, one that could potentially keep climbing for years and years.
Dividend machine
In 2021, Lloyds paid a dividend per share of 2p. That increased to 2.4p in 2022 and analysts expect it to hit 2.7p when it pays the 2023 dividend this year. Shareholder payouts are never guaranteed, but these look more solid than most.
I currently hold 9,353 shares in Lloyds, which I bought in June and September last year for a total of £4,040. They looked a bargain trading at less than 45p, but today they trade at just 41.4p. My stake is worth £3,876, a drop of 4.06%.
It’s far from my biggest portfolio holding and I’m keen to average down, but I’m wary. While I like buying dirt cheap income stocks – and Lloyds is certainly cheap trading at 6.1 times earnings – I’d like the prospect of capital growth at some point.
My big hope is that the Lloyds share price will rally once it becomes clear that inflation has peaked and interest rates can start to fall. At the end of last year, investors reckoned we were almost there and my Lloyd shares rebounded strongly. As rate cut hopes fade, so has the Lloyds recovery.
Should I buy or should I sell?
Analysts reckon that inflation will fall back to the Bank of England’s 2% target in April, when Ofgem’s energy price cap is cut. If that happens, the first base rate cut could follow, possibly in May but more likely June. As that day edges closer, Lloyd shares could finally show some life, but it’s not a done deal.
Lloyds was supposed to benefit from high interest rates, which allow it to widen its net interest margins, the difference between what it pays savers and charges borrowers. However, any benefit was offset by a potential rise in debt impairments, as squeezed mortgage borrowers risked defaulting on their loans.
The opposite could happen when interest rates fall. Debt impairment fears may slide but net interest margins will narrow. Again, they could cancel each other out. That seems to sum up Lloyds. The bank just can’t get its groove on.
Yet I’m not selling my shares. First, I bet when I do, the stock will fly. Second, Lloyds offers a jolly good yield. A high and rising income starting at 7.32% in year one? I think I’d be daft to sell. I’m just not in a rush to buy more though.
