Lloyds (LSE: LLOY) is one of the most heavily traded shares in the London market. But it has had a difficult 2020. Shares fell to depths they last plumbed after the 2008–09 financial crisis. Recently, the Lloyds share price has done well. It has increased around 30% in the past month.
The question now is, what to do next?
Lloyds remains a solid business
The share price has been battered as part of a general downwards re-rating of bank stocks in 2020. The cancellation of bank dividends also did not help investor sentiment in the sector.
However, I don’t think that really has much to do with Lloyds specifically. It is one of the biggest banking groups in the UK, with fascia including Bank of Scotland and Halifax as well as its eponymous Lloyds business. So in broad terms, its performance should reflect that of the UK economy overall. In a difficult year, the economy continues to show some resilience. The housing market is holding up well, for example.
The Lloyds share price masks an improving business performance. The bank returned to profitability in the third quarter, posting a pre-tax profit of £1bn. Its mortgage business is booming. Earlier concerns about the possible impact of the recession on the bank have not come to pass, with impairments now forecast to be at the lower end of the forecast range.
That all adds up to a business that seems to be doing well in the current recession. With its well-established brands and reputation, I expect customer demand to continue to be strong too.
Why the Lloyds share price looks good to me
Despite the bank’s good performance, the shares have not done as well. Even after their surge in the past month, they are still down 40% on where they began the year.
I think the shares will continue to move up as the market realises their value. Banks tend to be able to retain customers well due to the complications of switching. A tough economic environment like the current one tends to reward large players who can weather the storm, such as Lloyds. So I expect that its business will prove its resilience further in the next several years, helping the share price.
Not paying dividends makes the shares less attractive, but it means it can keep more money inside the business. That should help the future dividend payout pot. Before the pandemic, the bank was on course to pay around 3.3p per share this year. At the current Lloyds share price, the prospective yield is therefore in the high single digits if dividends are restarted at the same level. For a banking stalwart like Lloyds, that is a juicy payout.
I’d buy Lloyds at its current price
I like the strong position Lloyds has in UK retail banking. Its results have held up better this year than expected, which gives confidence for the future. Meanwhile, the lack of a dividend allows it to hoard money so when it does restart dividends I expect a juicy yield.
But the shares are still trading at what I think is a bargain price. I’d buy Lloyds shares today and hold them for the recovery.
