Lloyds (LSE: LLOY) shares have had a disappointing first half to 2022. With investor confidence continuing to be dampened by growing economic strains, the Lloyds share price finds itself down nearly 15% for the year.
This is a familiar story for the bank. Despite an impressive 30% gain in 2021, shareholders have seen losses of 36% over the last five years. So, currently sitting at around 43p, is now the time for me to be buying Lloyds shares?
Why have the shares sunk?
The firm’s fall may seem odd given it’s been posting some strong results in recent times. However, the drop can be pinned on a few main reasons.
Firstly, it’s due to the wider economic pressures it faces. With inflation continuing to rise in the UK, interest rates have been pushed up to combat this. This could be problematic for Lloyds. Higher rates may see customers defaulting on payments. And with the cost of living rising, this may mean consumers are less likely to take out loans. If this were the case, it would eat into Lloyds’ profits.
Another reason is because of the potential recession on the cards, which has led to flagging investor confidence. The Lloyds share price took a massive hit during the last financial crisis. And it has struggled to recover since. Should this occur again, the shares may fall even further.
However, despite these issues, I do see value in the firm.
One of my main attractions to Lloyds is its strong dividend yield. Currently with a yield of 4.66%, this sits above the FTSE 100 average. With cash also losing value due to rising inflation, this seems like a smart move for me to partially hedge my money against spiking rates. What I further like about the stock is its low valuation. With a price-to-earnings (P/E) ratio of just 5.75, this is considerably less than the benchmark P/E ratio of 10. Considering these two factors, Lloyds shares seem like a smart move for me right now.
While rising interest rates could be detrimental for the business, it could also benefit from current economic conditions. Essentially, with higher interest rates the firm will be able to charge lenders more when they borrow. This, in turn, could boost revenues.
Lloyds has also enjoyed a prosperous period with rising house prices. However, there are signs that the housing market is beginning to slow down. With prices beginning to slide slightly, this means fewer people may be taking out mortgages. As the UK’s largest mortgage lender, this could be a concern for Lloyds.
What I’m doing
Despite the headwinds the bank may face, I’d be willing to buy Lloyds shares today. I like its low valuation. And coupled with the substantial dividend yield it offers, I think this makes the stock a smart buy. The potential benefits from rising interest rates may also help offset some of the firm’s losses. While it may face pressure in the near future, I’d add Lloyds to my portfolio today as a long-term addition.
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Charlie Keough has no position in any of the shares mentioned. 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.