Shares in Lloyds Banking Group (LSE: LLOY) have had a rotten millennium. They peaked at 976p in 1999, and trade at a pathetic 45p today. Yet this remains the UK’s most traded stock. Investors still believe in it. Strangely, so do I.
I can see plenty of reasons to turn my back on Lloyds shares forever. Its role in the financial crisis is only one of them. The subsequent stock price recovery has been slow, with countless false dawns along the road to nowhere.
Lloyds shares actually trade lower than they did in 2013, when they brushed 50p. Investors who thought they were buying a bargain have suffered almost a decade of frustration. And it’s not over yet.
I’d buy Lloyds shares this month
So far this year, Lloyds shares are down another 10%. Many thought they would pick up as the Bank of England hiked interest rates. This allows banks to widen their net interest margins, the difference between what they charge borrowers and pay savers.
With the BoE expected to hike again in May, Lloyds shares should be rising, not falling. Yet other factors are combining to make investors nervous. The big one is that rampant inflation has triggered a massive cost of living crisis, and this will hit Lloyds’ business and retail customers hard. As management warned last Wednesday, defaults could rise.
Lloyds posted a healthy pre-tax profit of £1.45bn in the three months to 31 March, although this was a year-on-year drop of £311 million. A key reason is that it set aside a net impairment charge of £178m to cover potential customer defaults. By contrast, this time last year it released £336m for Covid-related impairments that never happened.
The Lloyds share price hopped 1.6% in early trading, but investor joy was muted. Concern centred on chief executive Charlie Nunn’s warning about the uncertain outlook for the UK economy, “particularly with regards to the persistency and impact of higher inflation”.
At least net interest margins are improving, due to “bank base rate increases and deposit growth”, offsetting reduced mortgage book margins. Lloyds has learned its lessons from the financial crisis, and lending remains “prudent”.
That 5.2% forward yield is tempting to me
Where the Lloyds share price goes next largely rests on whether the UK avoids a recession and house price crash. Given housing shortages and the fact that mortgage rates are still historically low, I’m not expecting anything too bloody on the property front.
Lloyds shares look cheap trading at 6.2 times earnings. They now yield 4.3%, covered 3.8 times by earnings. The forecast yield is 5.2%, with cover thinning but still healthy at 2.6. Operating margins are forecast to jump from 18.4% to 38.5%.
I like these numbers and would still buy Lloyds shares in May. Yes I know they have disappointed for years but I want to have skin in the game when they finally come good.