“Two for a pound, two for a pound. Get your Lloyds (LSE: LLOY) shares here!” In the voice of an old-time market trader — that appeal would grab my attention. Right now, as Lloyds shares continue to trade for under 50p apiece, I could indeed buy two for a pound. But should I?
Declining Lloyds share price
First I think it is helpful to try and understand why Lloyds shares are trading at these levels in the first place.
They are around 7% higher now than they were a year ago. But on a longer-term picture, the price has been in decline. The shares are around 30% below their level five years ago.
On one hand, the explanation for that may that seem fairly obvious. The economy has been slowing down, with inflation rising. That could mean that more borrowers default on loans, which for banks like Lloyds can lead to smaller profits or even a loss.
On the other hand, might Lloyds shares be attractively valued even accounting for such risks? After all, the financial services powerhouse has continued to turn in an impressive business performance. In the first half, its post-tax profit fell 27% compared to the same period last year. But it still came in at £2.8bn, a sizeable amount. The Lloyds market capitalisation is only around £32bn, so its price-to-earnings ratio is in the single digits.
In its results, though, the bank did refer to an “uncertain” macroeconomic outlook. If I asked the market trader what he thought trade might be like among the stalls in the months and years to come, hearing “uncertain” as a response would not reassure me about future profitability.
Risk and reward
Still, Lloyds has some impressive assets that could help it prosper in the long term, including iconic brands and a large customer base. It is the country’s biggest mortgage lender.
Lloyds is also embracing a more digital future, as I recently discovered when I tried to use a central Edinburgh branch of Bank of Scotland only to find that it had recently been closed. While such closures could hurt customer loyalty, the bank’s 19m digitally active customers give it a strong foundation for future growth.
On that basis, Lloyds shares, with their 4.6% dividend yield, do look potentially cheap to me. If I bought now and held until the economy brightens up again, the bank’s assets may help it make large profits and sustain a higher share price.
Why I’m not buying Lloyds shares
But I do not plan to buy the shares for my portfolio because of the risk side of the equation.
While I recognise the potential upside at today’s price, Lloyds shares strike me as being closely linked to the overall state of the UK economy. As the nation’s biggest mortgage lender, a serious downturn in housing prices could hurt profits badly, I fear. I also see a risk of consumer loan defaults as inflation bites into people’s spending power.
So although I can buy two Lloyds shares for a pound, I do not plan to make such a move.