After years in the doldrums, the Lloyds (LSE: LLOY) share price is finally giving investors something to celebrate. And I think there’s more excitement to come.
Lloyds shares flatlined for years after the 2008 financial crisis as the traumatised banking sector tried to piece itself together. There was the odd share price spike in that time, but it never led anywhere.
The pain lasted too long. Lloyds had started paying dividends again. The yield had crept past 5%. The company was making billions. Its shares were dirt cheap, trading as low as five or six times earnings. Yet investors didn’t want to know.
FTSE 100 recovery stock
Eventually, I decided this couldn’t go on and bought the shares last year. I’m happy I did.
The share price is up 28.35% over the last 12 months. With dividends on top, the total return is heading towards 35%. And I think this is only the start.
I thought Lloyds shares would rally hard when central bankers finally started cutting interest rates, but that hasn’t happened yet.
This means investors can still get yields of up to 5% from cash and bonds, while taking little or no risks with their capital. This makes dividend stocks look a little less tempting, because the risks are higher.
When central bankers such as the US Federal Reserve and Bank of England finally decide they’ve licked inflation, they’ll start slashing interest rates. At that point, yields on cash and bonds will fall. Yet the Lloyds yield won’t. Quite the reverse.
Today, Lloyds shares have a trailing yield of 5.04%. That’s forecast to hit 5.37% in 2024 and 5.9% in 2025. At that point, savings rates and bond yields could be heading towards 3%.
Great for dividend income
When that happens, money should rotate into stocks like Lloyds. And the share price should rise, if I’m right. As ever when investing, there are no guarantees.
Falling interest rates won’t be all good news. This will squeeze Lloyds’ net interest margins, the difference between what it charges borrowers and pays savers. That’s a key measure of company profitability, and it’s already started to narrow.
Yet lower rates will be good news for the banks in other ways, reducing debt impairments, reviving the housing market and putting money into people’s pockets. Plus the UK economy is growing faster than expected too.
There are other risks. We still don’t know how the motor finance mis-selling scandal will plan out. Lloyds has set aside £450m to cover compensation costs. It could be on the hook for much more.
Yet with a long-term view, I think the shares still look good value trading at 9.52 times forward earnings. They’re not as cheap as when I bought them last year, but I’ll still top up my stake when I have the cash. The rising yield and recovering share price are impossible for me to resist.
