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Lloyds shares are down 20% since January. Should I sell or buy more?

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So far this calendar year, fans of rollercoaster rides have a lot in common with shareholders of Lloyds Banking Group (LSE: LLOY). That’s because Lloyds shares have zigzagged up and down like the bumpiest ride at Alton Towers or Thorpe Park.

Lloyds shares oscillate wildly

At their 2022 high, the shares briefly hit 56p on 17 January. But five weeks later, Russia invaded Ukraine, sending global stock markets into meltdown. At its 2022 low, the Lloyds share price crashed to 38.1p on 7 March. It has since rebounded and, as I write, stands at 45.5p. Here’s how it has performed over six periods:

Five days 1.0%
One month 8.3%
Six months -15.6%
2022 YTD -4.8%
One year -2.1%
Five years -29.6%

Despite its recent rebound, this FTSE 100 share is down over periods ranging from six months to five years. Furthermore, it’s lost almost three-tenths of its value over the past half-decade. However, these figures all exclude cash dividends, which would boost investor returns by a few percentage points each year. Even so, with the Footsie up 2.1% over the last five years, Lloyds shares have been a disappointing investment for many.

We bought Lloyds in late June

After six months of sitting on our hands, my wife and I started aggressively buying cheap UK shares in mid-2022. In late June, we bought Lloyds stock at an all-in price (including 0.5% stamp duty and buying commission) of just below 43.5p. The price has since risen by just over 2p, delivering an early paper profit.

However, when I look at Lloyds’ fundamentals today, I still see deep value. Why? First, the stock trades on a price-to-earnings ratio of 7.5, for an earnings yield of almost 13.3%. This compares very favourably to the FTSE 100’s corresponding figures of 13 and 7.7%, respectively. The higher the earnings yield, the ‘cheaper’ a share appears, all else being equal.

Second, Lloyds shares offer a dividend yield of 4.7% a year, which is almost 1.2 times the cash yield of the wider FTSE 100 index. What’s more, this payout is covered over 2.8 times by earnings. This suggests to me that it’s fairly safe and solid — for now, at least. Also, with such high dividend cover, there’s scope for future uplifts to these regular cash distributions.

Lloyds could well struggle in 2022-23

As a business, Lloyds did very well after the Covid-19 crisis of 2020. But several storm clouds are now gathering over the UK economy. I think the Black Horse bank faces multiple headwinds over the next 12 to 18 months. These include red-hot inflation (driven by soaring energy bills), rising interest rates cooling down the housing market, falling business and consumer sentiment, the war for Ukraine, and the growing risk of an economic slowdown or full-blown recession.

Despite these rising risks, I still view much of this bad news as already priced into Lloyds shares. In other words, they still looks cheap to me on a long-term, Foolish view. Hence, I won’t be selling. And if the price falls much further, we will probably buy more shares. In a few years’ time, I hope to see the Lloyds share price well above £1, with any luck!

The post Lloyds shares are down 20% since January. Should I sell or buy more? appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Lloyds Banking Group shares. 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.