Back in late 2017, I bought Lloyds (LSE: LLOY) shares for my ISA. So far, I’m yet to see any capital gains as the share price struggled last year. However, I have been pleased with the steady stream of dividends that I have received, as Lloyds’ high dividend yield was one of the main reasons I bought the stock.
Would I buy more shares in Lloyds for my ISA right now? Absolutely. Here are three reasons that I continue to rate Lloyds shares as a ‘buy.’
Lloyds’ recent full-year FY2018 results showed that the bank continues to make progress, which is pleasing from a shareholder point of view. For the year, underlying profit rose 6%, while earnings per share increased by an impressive 27% to 5.5p. The bank also reported that its balance sheet remains healthy with a capital build of 210 basis points, and advised that credit quality remains strong with no deterioration in credit risk. So there was nothing in these results to change my view on the stock.
I was also pleased that Lloyds hiked its dividend again. The bank increased its payout by another 5% to 3.21p per share, which now marks four consecutive dividend increases since Lloyds reinstated its divi in 2014. At the current share price of 63p, that payout equates to a yield of 5.1%, which I see as attractive in today’s low-interest-rate environment.
Furthermore, Lloyds said that it will implement a share buyback worth up to £1.75bn which indicates the bank has plenty of excess cash. Continued buybacks could help push earnings per share up going forward.
Turning to the stock’s valuation, Lloyds shares continue to offer value, in my view. City analysts currently expect the bank to generate earnings per share of 7.84p this year, which places the stock of a low P/E of just 8. I see that valuation as cheap and believe that the stock has the potential to move higher.
Risks to consider
Of course, there are plenty of risks to the investment case. One key risk, which a few of my colleagues have discussed recently, is the UK housing market as Lloyds is the largest mortgage lender in the UK. A property market downturn could have significant implications for Lloyds.
Another threat, that I touched on here, is the rapid rise of financial technology (fintech) firms and digital banks, as these kinds of companies are changing the industry. I’ll point out that Lloyds is making a strong effort to transform itself into a digital bank which is good.
There’s also PPI to consider. The claims deadline is 29 August. A rush of claims at the last minute could hit profits.
Attractive dividend stock
Overall, however, I continue to rate Lloyds as an attractive dividend play. At the current valuation I see a lot of value on the table, and with a 5.1% yield on offer, I’d be happy to buy more shares for my ISA.
Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.