After record profits, are Lloyds shares a buy, sell, or hold?

As Lloyds pulls in pre-tax profits of £7.5bn, boosts its dividend, and continues to repurchase shares, are the company’s shares a bargain below 50p?

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Shares in Lloyds Banking Group (LSE:LLOY) have been climbing this week. The catalyst was the company’s report outlining its earnings for 2023. 

In line with reports from Barclays and NatWest earlier in the week, there was a lot for investors to feel positive about. But with the stock still below 50p, is there still a buying opportunity worth considering?

Record profits

Boosted by a £541m repayment of a loan once thought to be impaired, pre-tax profits came in at £7.5bn – a 57% jump on the £4.8bn earned in 2022. That’s the highest level for 20 years.

Lloyds pre-tax profits 2004-24

Created at TradingView

A lot of this has been due to improving margins. The bank achieved a net interest margin of 3.11%, an increase on 2.94% from 2022. 

Across the board, UK banks have been reporting strong profitability during 2023. This has largely been due to interest rates being at their highest levels since 2008.

UK interest rates 2004-24

Created at TradingView

Things have been turning down in the last three months of 2023, though. For Lloyds, net interest margins fell from 3.08% to 2.98% and pre-tax profits fell from £1.86bn to £1.78bn.

Shareholder returns

Boosted profits often mean higher shareholder returns. And this is being reflected in the Lloyds dividend, which is going to be 2.76p per share. 

That’s a 15% increase on the 2.4p per share the company paid out in 2022. And it brings the dividend close to its pre-pandemic levels.

Lloyds dividend per share 2004-24

Created at TradingView

In addition, Lloyds announced a £2bn share buyback programme. That amounts to around 6.8% of the current market cap, but is only in line with the previous year.

Despite the bank setting aside £450m to cover potential motor insurance fines, shareholders stand to do well. Together the dividend and the buyback amount to around 12% of the current market value. 

Buy, sell, or hold?

There’s no two ways about it – 2023 has been a very good year for Lloyds. But with margins and profits already falling, investors should be wary about expecting the same results in 2024.

It seems likely that interest rates are going to fall from here. That should cause lending margins to contract and with no investment banking arm this would have a significant effect on Lloyds.

Even if rates stay high, though, there’s a danger of increased competition and a higher risk of credit defaults. The drop off in profitability towards the end of the year illustrates this.

With the share price still firmly below 50p, I think the stock still looks like good value. But it’s not screaming ‘buy’ at me the way it was when things were improving.

Bank stocks

I think UK bank stocks are attractively priced and I have done for some time. It’s significant, in my view, that Lloyds is still priced roughly where it was during the banking crisis of last year.

I have a portfolio that’s heavy on banking companies at the moment. But even so, after this week’s results, I think both Lloyds and Barclays look like interesting opportunities.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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