Over the past year, shares in Lloyds (LSE: LLOY) have moved up by 63%. That is a return of almost two thirds in just 12 months – an appealing performance for me. But recently the upwards trajectory has stalled. In the past month, for example, the Lloyds share price has fallen 7%.
As the share price falls, I see a buying opportunity for my portfolio. Here are three reasons why.
Lloyds: a banking powerhouse
Banking is an industry I assume is here to stay. There may well be significant changes, some driven by external forces like fintechs, and some by internal ones, such as a desire to cut costs by shifting to a digital banking model. But imagine the world a decade or two from now. In my view, whatever else may change, people are still going to need to save money, withdraw money, buy homes, get loans, take out mortgages and tuck funds away in investment vehicles.
Lloyds is one of the biggest players in the UK banking sector. Now, being a big name in a durable sector doesn’t guarantee survival as an independent company. Consider Morrisons, for example. It is one of the leading names in the resilient supermarket sector, but is currently the subject of a bidding contest. However, size matters and the bigger a company is, the easier it becomes for it to stay independent or dictate its own terms in any sector consolidation. I like Lloyds’ leading position in an industry I think is here to stay. While the Lloyds share price makes it a ‘penny stock’, the bank has a £30bn+ market cap and the characteristics of a blue-chip company with its long history and well-established business. That makes it attractive for my portfolio.
Simple business model
While the business model of banking is simple and has been essentially unchanged for centuries, the business itself is vastly complex and highly regulated. That can make banks’ annual accounts challenging to comprehend. With huge liabilities on their balance sheets but massive deposits to cover them, it is difficult to read an annual report for a bank and truly understand its financial health.
One reason I like Lloyds as a private investor is that its business is simpler than that of many banks. It has a focus on the UK. It tends to concentrate its efforts on personal and business banking. That keeps it away from potentially lucrative but riskier activities such as investment banking. Meanwhile, its limited geographic reach reduces the risk of a huge financial exposure developing in a market thousands of miles from headquarters.
There are still risks, of course. Lloyds could make bad decisions in its lending choices, and that could damage profits. An economic downturn could increase default rates, which would also risk cutting Lloyds’ profits.
UK dividend shares: Lloyds
The bank has restarted dividends. It stockpiled excess cash while dividends were suspended, so its CET ratio at the half-year point was 16.7% versus its target of around 13.5%. In short, that translates to considerable surplus funds that could be used to pay a special dividend in future.
Dividends are never guaranteed, but I like the bank’s progressive dividend policy. As the Lloyds share price pulls back, I see a buying opportunity for my portfolio.
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Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group and Morrisons. 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.