Lloyds (LSE: LLOY) shares are down 16% year-to-date. For perspective, that’s worse than the FTSE 100 as a whole (-5%). However, it’s still a far better performance compared to the likes of other immensely popular stocks with retail investors. Engine-maker Rolls Royce is down 30%. Growth-focused Scottish Mortgage Investment Trust has tumbled 40%!
So should I consider Lloyds a safe bet/great buy at this level? And, if I do, would I actually be willing to pull the trigger?
Reasons to be optimistic
There are certainly a few reasons to think now might be an optimum time to buy. Having been so low for so long, rising interest rates should be a boon for Lloyds. This is because the margin between what it charges for loaning money out and what it pays out to savers will increase. In other words, the bank makes more money.
Lloyds is also the biggest mortgage lender in the UK with a market share of around 20%. That could prove a tailwind if demand for housing stays robust.
Relative to the UK stock market, Lloyds shares also look cheap at a little less than seven times forecast earnings. As far as the banking sector is concerned, rivals HSBC and Barclays trade for over nine times and five times earnings respectively. So Lloyds — like Standard Chartered (also on a P/E ratio of seven) — occupies the middle ground in terms of valuation among UK-listed banks.
Don’t forget the dividends!
As encouraging as all this is so far, the main attraction of Lloyds shares, in my opinion, is the dividend stream. Right now, analysts have the bank returning 2.32p per share in 2022. Dividing this by the share price, as I type, gives a yield of 5.5%. That’s not the biggest payout I could get from a FTSE 100 company. However, it’s more than the 4% I’d get from the index as a whole.
Another positive is that the dividend from Lloyds shares should be covered well over twice by profit. In other words, investors can be pretty confident that cash will hit their accounts.
No sure thing
So what could go wrong? Well, a recession wouldn’t be great news. With people forced to reign in their spending, Lloyds will see lower demand for loans and credit cards.
As things stand, I reckon we’re there already. Moreover, signs of rising bad debt in the half-year numbers, due towards the end of July, could see Lloyds shares sink lower. Things could go from bad to worse if the housing market dramatically cools.
As a result of the above, there’s no guarantee that chunky dividend stream will always be there. As the pandemic showed, companies can decide (or be pushed) to stop paying out cash as a cautionary measure. The only way of mitigating this threat to my income would be to hold shares in companies away from the financial sector.
My verdict on Lloyds shares
Ultimately, Lloyds shares still aren’t for me. As a 40-something chasing financial independence, I’m tilting my portfolio towards stocks with a strong pathway towards growth. If I were approaching retirement and wanting to supplement the State Pension, things might be different.
For now, I reckon the shares are reasonably priced on a risk/reward basis. But screamingly good value? Maybe not.
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Paul Summers owns shares in Scottish Mortgage Investment Trust. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, and Standard Chartered. 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.