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During the global financial crisis of 2007-2009, several British banks collapsed, while others were on the brink. Major lenders, including Lloyds Banking Group (LSE:LLOY) share price: fell to record lows.
Over the next few years, bank stocks recovered, but never returned to their previous highs. For much of the last decade, I avoided investing in financial stocks, spooked by weak balance sheets and previous poor performance.
The price seems to be within the range
If we look at the five-year chart of Black Horse Bank shares, they haven't risen above 65p since December 2019. And during the Covid-19 crisis of 2020-21, stock markets crashed, sending financial stocks tumbling. . I wish I had bought Lloyds shares at less than 25p in September 2020.
Eventually the shares seemed like a valuable bet to me, so my wife and I bought at 43.5p per share in June 2022. I was initially pleased with our purchase, and the price jumped to 54.33p on the 9th. February 2023.
Unfortunately, that number turned out to be high for this year. Shortly after, a US banking crisis hit financial stocks. And with UK economic growth slowing, Lloyds' share price hit its 2023 low of 39.42p on October 24.
A dividend dynamo
In the last trading session before Christmas, it closed at 48.05p on Friday 22 December. This values the entire business at £30.5bn, a modest price in my view.
Today, my wife and I have made a paper gain of 10.6% since our purchase in mid-2022. On the other hand, we bought Lloyds shares for their ability to generate dividends that will outperform the market for years to come.
Lloyds shares currently trade at 8.6 times earnings, producing a return of 11.6%. This means its cash yield of 5.3% per year is covered by 2.2 times historical earnings.
Furthermore, thanks to its retained profits, the bank has billions of pounds of additional capital on its balance sheet. Over time, I expect this to be returned to shareholders through share buybacks and dividend increases. This motivates me to hold firmly to our bet.
A solid bet on recovery?
Lloyds shares are said to be the most widely held and actively traded London shares. However, they have not gained ground in recent years: they increased 3.9% in one year, but lost 6.2% in five (excluding dividends).
That said, many investors see the bank as a bellwether for the UK economy. Therefore, when Britain is booming, this rising tide could boost Lloyds shares. Furthermore, lacking an investment bank, I see the group as an exclusive bet on interest rates and credit growth in the UK.
For example, let's say inflation remains stubbornly high in 2024, preventing the Bank of England from lowering interest rates. This should increase Lloyds' net income margin – the profits it makes on loans minus what it pays on savings.
Also, what happens if the economy doesn't fall into recession in 2024, but instead turns the corner and grows? This could mean higher income from credit growth, as well as lower bad debts and credit losses. Once again, this would be good news for British banks.
Of course, things could turn the other way, with economic weakness putting even more pressure on consumers. This could mean lower revenue, profits and cash flow for banks. Still, I view the Lloyds share price as an exciting recovery play for 2024-25 and worthy of investor consideration.
