I see Lloyds (LSE: LLOY) shares as a geared play on the economic recovery, when it finally arrives. Recent events appear to confirm my expectations.
The shares rallied hard as markets celebrated Thursday’s interest rate freeze, jumping 4.06% against 1.42% for the FTSE 100 as a whole. When rates finally peak and start to fall, I reckon it’s likely to outpace the index.
Brighter days ahead
Like all the banks, Lloyds is plugged into the global economy. When personal and business banking customers are buzzing, banks buzz more. They sell more loans and more savings products, and enjoy wider net interest margins, the difference between what they charge borrowers and pay savers.
They also suffer fewer bad debts and loan impairments, as mortgage borrowers are less likely to fall into arrears, while rising prices mean that Lloyds should recoup its money if it does have to auction off repossessed homes.
Naturally, the cost-of-living crisis has been bad for Lloyds. As the UK’s biggest mortgage lender, and owner of Halifax, Lloyds would be at the sharp end if house prices do crash. Its own analysts reckon the market will fall 5% this year and another 2.4% in 2024.
However, they expect a tentative recovery in 2025. Lloyds shares are likely to rise before house prices do, as investors anticipate brighter times.
Now here’s the sticking point. I’ve been saying for several years that Lloyds shares look terrific value, but they haven’t hit the recovery trail. Today, the stock trades at just 5.7 times earnings, with a price-to-book value of just 0.6. The share price trades at the same level as last year. Over five years it’s down 27.89%. That’s value trap territory.
However, the markets may be getting ahead of themselves today, with the assumption that we have hit peak interest rates. If the Middle East crisis spreads and imperils oil supplies, inflation could surge and the recovery could be delayed.
Bumpy road ahead
Also, we have waited so long for peaked interest rates that reality may prove disappointing. For a start, it could squeeze net interest margins. Lloyds’ recently slipped to 3.08%, and that’s with base rates at a 15-year high.
When the recovery comes it will surprise us all, as recoveries tend to do. At that point, Lloyds shares could explode and I’m itching to get in early. How long have I got? No idea. We could enjoy a year-end Santa rally, or may have to wait until 2025, or beyond. The sooner I buy them, the better.
With a forecast yield of 6.68% in 2023 and 7.36% in 2024, I should get a pretty solid return from dividends while I wait for the share price explosion. Lloyds has been generous with the share buybacks, and I’m expecting that to continue too.
These are tough times, but Lloyd is still making a heap of money, as Q3 profits jumped by another £576m to £1.86bn. Of course, this could backfire by triggering another windfall tax. There are always risks when investing. Lloyds is a big holding for me, but that won’t stop me buying more when I can.
The post Dirt cheap Lloyds shares are itching to explode! I’m desperate to buy more today appeared first on The Motley Fool UK.
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Harvey Jones has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.
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