Lloyds shares (LSE: LLOY) shares have failed to excite over the last five years. During this time, the stock is down 32%.
Across the last 12 months, it’s down 1%, meaning today I can pick up the FTSE 100 bank for just 43p.
Why is Lloyds so cheap? And should I be in a rush to snap up some shares at this price?
Rising interest rates
Let’s start with the most obvious factor surrounding Lloyds right now. Interest rates.
This year has seen inflation run rife. And therefore, to combat this the Bank of England has been hiking rates. In its latest update, it pushed up rates by 0.5% to 1.75%, a figure not seen for years.
With some predicting inflation could reach 18% come next year, it seems likely that the BoE isn’t finished just yet. For Lloyds, this is a good thing.
This is because it allows the bank to charge customers more when they borrow from it. And in turn, this boosts Lloyds’ revenue. The hikes already seen in 2022 could have contributed to its net income rising 12% in the first half. The upgraded outlook for its net interest margin could also be attributed to rising rates.
However, it’s not just the potential for higher interest rates that draw me to the stock. With inflation over 10%, cash in a current account is losing its value. And with that, its 4.9% dividend yield is an attractive proposition. This stream of passive income is a smart way for me to put my money to work. Given the current economic climate, this seems ideal.
Adding to this, its 7.1 price-to-earnings ratio is a further benefit. Compared to its FTSE 100 peers, this looks cheap.
With that said, as one of the UK’s largest mortgage lenders, the slowdown in the housing market could be of concern. However, its new rental venture, Citra Living, shows the business is diversifying. Through this, it plans to buy 50,000 homes by the end of the decade. With the firm predicting demand to increase across the next five years, I think this could be a strong move by Lloyds.
Not all good news
While I see plenty of benefits, there are a few issues that worry me.
To start, rising interest rates are good. However, they may also mean people default on their payments. It could also see new business dropping off.
On top of this, the UK is set to fall into a recession. Lloyds has struggled in previous crises, so as a potential investor this is alarming.
Should I buy?
At its cheap price of 43p, is it time to add Lloyds to my portfolio?
I’d say yes. The months ahead may be rocky, but at this price, I think the shares are too good to pass on. The bank is set to benefit from rising rates in the future. And with its low valuation, high dividend yield, and rental venture, I’d happily buy the stock today.