Lloyds (LSE: LLOY) shares have jumped 25% in the last 12 months. Usually, when a solid FTSE 100 blue-chip like this one enjoys a strong run, I’m a bit wary. Am I the muggins who buys just as the upwards trend peaks?
I prefer to buy shares when they’re out of favour, and I know for sure that I’m not buying at the late stage of a rally.
I’m particularly wary given that we’re talking about the Lloyds share price here. It’s gone nowhere slowly since the financial crisis, with every apparent recovery proving yet another false dawn.
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Bargain FTSE 100 stock
With that in mind, I loaded up on its shares in June and September last year, when nobody wanted to know. I’m delighted I did. My stake’s up 33.75%, including the two dividend payouts I’ve received so far. That’s not a bad start.
I bought Lloyds shares when they were trading at around six times earnings and yielding just over 5%. In other words, a bang-on bargain. I decided that after years in the doldrums, the worst might just be over.
The dividend was back. The company was making billions in quarterly profits. Markets were being perverse and ignoring this, I decided. I also thought they would change their tune once interest rates started to fall.
This would finally inject some joy back into the economy, and make Lloyds business and retail customers feel better off. It might also light a fresh fire under the housing market.
Against this, I had to weigh the danger that lower rates would squeeze Lloyds’ net interest margins – the difference between what it pays savers and charges borrowers. Given that debt impairments were also likely to reduce, I wasn’t too concerned.
Super dividend income
One year on from my first Lloyds purchase and we’re all still waiting for that interest rate cut. We may have to wait until August. Or possibly September. Yet Lloyds is up, as investors anticipate that happy day. This doesn’t mean the stock will go gangbusters. Markets are forward-looking, and have largely priced that in. It should help though.
I love to average down on a stock, topping up my stake at the new lower price. Normally, this would rule out Lloyds. However, I can’t exactly say it’s overpriced today, trading at a modest 7.31 times trailing earnings.
The dividend’s still juicy, at 4.99%. This is forecast to rise to 5.24% in 2024, then 5.83% in 2025. That’s a high and rising income stream.
I accept the recent Lloyds recovery could be yet another false dawn. I’m also concerned about the Financial Conduct Authority probe into whether banks overcharged car buyers for finance. Lloyds has set aside £450m to cover the potential bill. Nobody knows how big it will be (or if there will be a bill at all).
I still think Lloyds shares are appealing at today’s price. If I didn’t already own rather a lot of them, I’d cheerfully buy more today.
