Many of the world’s most popular indices have entered correction territory. Although many shares have plunged from their all-time-highs, it has also presented an array of buying opportunities for me to buy the dip and capitalise on a potential recovery in share price, and this particular FTSE 100 share looks promising.
Banking on interest
With plenty of interest surrounding this company, both literally and figuratively, Lloyds Banking Group (LSE: LLOY) is a stock that I cannot possibly overlook. To start with, a low price-to-earnings (P/E) ratio of 6.41 makes this stock a cheap buy for me given that the FTSE All-Share’s average P/E ratio currently stands at 14. Furthermore, as banks stand to earn more in a higher interest rate environment, the anticipated and subsequent increases in interest rates by the Bank of England do provide tailwinds for the banking giant’s potential revenue.
Moreover, given that a substantial amount of Lloyds’ income is generated from mortgages, the increasing number of mortgage applications and house purchases in the UK will help the Lloyds share price, presenting it with momentum and upside potential. Despite many analysts and economists pointing towards a slower housing market, the recent housing data has bucked the trend as it has been seen to be moving in the opposite direction for now, as figures for both mortgage lending and mortgage approvals in January came in higher than expected.
In addition to that, the British bank is also about to go ex-dividend in less than a month, on 7 April 2022. Lloyds’ dividend yield currently sits at 4.18% (1.33p per share), hence giving me the opportunity to secure an above-average yield if I were to purchase shares now. Considering that the stock is currently trading at 15% off its one-year high, I see this as a potential chance for me to buy the dip.
Gallop with caution
With all of that being said, I should also mention that although interest rate rises do provide banks with the opportunity to increase their earnings by quite some margin, there is also a sweet spot (Goldilocks zone) in which banks such as Lloyds can capitalise on. If inflation continues to spiral out of control and the Bank of England becomes overly hawkish with its policies, Lloyds could very well move out of the Goldilocks zone. As a result of that, its revenue stream could take a substantial hit as consumer spending and borrowing decreases within the overall economy from unfavourable interest rates; this remains a possibility as average earnings are not increasing at the same rate as inflation. Not to mention, there is also plenty of geopolitical uncertainty at the moment, which brings an element of increased risk to Lloyds’ near-term future.