I’d been waiting for the right moment to buy Lloyds (LSE: LLOY) shares for ages, and last year I thought I’d spotted it.
The Lloyds share price, which had been going nowhere for years, suddenly lurched below 50p, and didn’t stop. I bought my first tranche of the stock at 45.05p.
I sat back and waited for the shares to recover, but by September they’d declined to 40.89p. So I bought more of the FTSE 100 bank. In retrospect, I should have thrown the kitchen sink at it, but I’m not complaining. I’ve done well enough.
Cheap and cheerful
My biggest concern was that I’d missed some hidden threat to profitability. Lloyds looked like an absolute steal, but investors were wary and I wondered why.
Many no doubt thought that Lloyd was far too boring to invest in, given its post-financial focus on everyday domestic products like savings and mortgages. The days of casino banking were over, but when I looked at the low valuation and high dividend, that didn’t worry me.
Lloyds shares were trading around six times earnings while yielding almost 5%. The yield was forecast to shoot past 6% in short order. That was more tempting than any savings account, with potential for share price growth on top.
I was inspired to finally take the plunge and buy the stock after judging that interest rates were close to their peak, and would soon start falling. Possibly at speed.
If that happened, the dividend income I’d be getting from Lloyds would hammer both the yield on government bonds and the interest rate on savings accounts. At that point, I expected a re-rating as income seekers dived in.
We haven’t had that interest rate cut yet. Yet the Lloyds share price has been climbing anyway. Over the last 12 months, it’s up 17.27%. Most of the action came in the last six months, which saw the stock rise 27.75%.
Personally, I’m up 24.88%, plus I received my first dividend on 14 September. I’ll get my second on 21 May, less than a couple of weeks away. I’ll reinvest it straight back into Lloyds shares.
Risks and rewards
My income should steadily climb over time. With the Lloyds share price now around 54p, it’s forecast to yield 5.52% this year and 6.02% in 2025. I’ll get a higher yield than that though, based on my lower entry price.
Lloyds shares aren’t as cheap as they were, but still look pretty good value trading at 9.3 times forward earnings.
As with every stock, there are risks. Peak interest rates may backfire on Lloyds, by slashing net interest margins, the difference between what it charges borrowers and pays savers. Q1 profits fell 28% as margins fell from 3.22% to 2.95%, while operating expenses rose.
The big banks may also be on the hook for mis-selling claims against their motor finance businesses. Some say it could be the next PPI scandal. That cost Lloyds £21bn, more than any bank. So far, it has set aside £450m.
I prefer to buy shares before they recover rather than afterwards. I think Lloyds shares are still a buy but I won’t add to my holdings. I’ll just enjoy watching them go.
