The Lloyds Banking Group (LSE: LLOY) share price fell sharply when Russia invaded Ukraine last Thursday, but the bank also released its 2021 results on this day. My feeling is that Lloyds’ annual report probably played a bigger role in stock’s slide.
Last week’s slide means that Lloyds shares were down by 6% at the end of February. Here, I’ll explain why I think the stock fell and why I’m tempted to buy Lloyds for my portfolio at current levels.
Profits up and the dividend is back
Lloyds generated a pre-tax profit of £6,902m last year, compared to £1,226m in 2021. However, the main difference between these two numbers is the bank’s £4.3bn allowance for bad debt in 2020.
Stripping out bad debt charges and other one-off costs, Lloyds’ underlying pre-tax profit rose by 6% to £6,833m in 2021. However, although profits rose, they were still slightly below analysts’ forecasts. This may be one reason why the Lloyds share price fell on Thursday.
Fortunately, the dividend was reinstated as expected. Shareholders will receive a total payout of 2p per share for 2021, giving a trailing dividend yield of 4%. There’ll also be a £2bn share buyback, which could provide some support for the share price.
£4bn growth plan
Lloyds’ new chief executive Charlie Nunn wants to boost growth. Over the next five years, he plans to invest £4bn to help Lloyds sell extra products to existing customers and attract new customers. Nunn is targeting the “mass affluent” — people with income or wealth of more than £75,000.
Lloyds says that, on average, its customers have 2.4 products with the bank, but seven financial products in total. Nunn wants to persuade customers to switch products such as insurance and wealth management from other providers to Lloyds. He reckons that this could generate £1.5bn of extra revenue each year by 2026.
To me, it looks like he wants to reduce Lloyds’ dependency on interest income from mortgages. Diversifying the group’s income in this way makes sense to me.
As the UK’s largest mortgage lender, Lloyds is heavily exposed to the housing market. After a decade-long housing boom, I think there’s some risk of a slowdown if interest rates continue to rise. That could hit Lloyds’ profits.
Lloyds shares: would I buy?
Nunn’s strategy looks a positive move to me, but it does seem a bit cautious. This may be another reason why Lloyds’ stock fell last week.
However, as a potential shareholder, I wouldn’t want too much excitement from Lloyds. I’m more interested in a reliable dividend income and steady growth. In my view, Lloyds could be well-positioned to deliver these benefits.
At current levels, Lloyds offers a well-supported 5% dividend yield and trades at a discount of more than 10% to its book value. For me, that looks like a good value income buy.
If I didn’t already own a UK banking stock in my ISA portfolio, I would be tempted to buy Lloyds shares today.