Last month, Lloyds Banking Group (LSE:LLOY) reported pre-tax profits of £7.5bn for 2023. Despite this, the stock is still 1% lower than it was at the start of the year.
If I’d invested £1,000 at the beginning of January, my investment would have a market value of £990 today. But I think the outlook for the company’s pretty good.
Shareholder returns
Lloyds is planning on using a good amount of its windfall to reward shareholders. Some £2bn of this is coming through a share buyback programme.
At today’s prices, this could reduce the number of shares outstanding by 6.6%. That’s significant for a company that also managed a 5.63% reduction in 2023.
On top of this, there’s also a significant dividend on offer. Investors who buy the stock before 11 April stand to receive 1.84p – around 4% of the current share price – in May.
As an investor considering buying the stock today, I can therefore see my way to a 9% return in pretty short order. And that makes Lloyds shares look attractive at the moment.
Interest rates
The real question is how long it can last? Interest rates – which have been helping profit margins across the banking sector – seem set to come down at some point this year.
This looks like a risk for investors considering buying Lloyds shares and I think it probably is, on balance. But there are also some reasons for optimism.
One is that the prospect of lower interest rates has been forecast for some time. And it seems to keep retreating as the Bank of England prioritises bringing down inflation.
Another is that, other things being equal, lower interest rates reduce the chance of loan defaults. This helps offset another significant risk for the bank at the moment.
Outlook
Overall, I think the £7.5bn the bank managed in pre-tax profits might be a one-off that I’m not expecting to see repeated soon. But investors can turn this windfall into a permanent boost.
At today’s prices, Lloyds can reduce its share count by 4.25bn with its existing buyback programme. And that’s a permanent reduction that should benefit shareholders indefinitely.
Investors can also get a lasting benefit from their one-off dividend. By reinvesting it to buy more shares, they can ensure their stake in the business is permanently enhanced going forward.
To some extent, this should help offset the effect of lower profits. That’s why I think the rest of 2024 looks much better for Lloyds shareholders than the first couple of months have been.
A stock to consider?
I think Lloyds shares look like a fine investment at today’s prices. I’m considering adding them to my own portfolio in my Stocks and Shares ISA.
It looks to me as though the stock market is treating last year’s record profits as a one-off. While I think that’s probably right, as said, the shareholder returns could have a lasting impact for investors.
Interest rates remain a constant danger – too high and the risk of loan defaults increases, too low and margins tighten. But I think there’s a good margin of safety at today’s prices.
