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Everyone seems to have their own opinion on the Lloyd's (LSE:LLOY) share price.
Is this a great buying opportunity as macroeconomic volatility continues to weigh on banking stocks that could eventually lead to a turnaround? Or is it something to be avoided given the insurmountable problems ahead?
Here is my point of view!
Challenges ahead and bullish features
Lloyds shares have not excited the world in recent years. Over a 12-month period they are down 22%, from 53p this time last year to current levels of 41p.
Looking further back, over a five year period they are down 26%, from 56p to current levels. I would say they never really recovered from the 2008 financial crisis.
However, there are some bullish aspects of Lloyds that appeal to me. For starters, its position as the UK's largest mortgage lender cannot be ignored. Plus, it's entering the build-to-rent market, which could offer it a whole new source of income and drive the stock higher in the long term. The rental market is currently booming and this could continue due to the current economic turmoil.
Moving on, the stock looks very cheap with a price-to-earnings ratio of six. According to forecasts, it does not seem that it will increase much in the coming years.
Finally, a dividend yield close to 6% is very attractive. This is higher than the FTSE 100 average of 3.8%. However, it should be noted that dividends are never guaranteed.
From a bearish perspective, there is a reason why the P/E ratio may not increase or the stock may not rise for a couple of years. Economic turbulence compounded by higher interest rates and soaring inflation have caused a weaker housing market. Furthermore, in my opinion, the current housing shortage in the UK could harm investment performance and viability, at least in the short to medium term.
Rising interest rates helped boost performance, but also greatly increased the risk of loan deterioration. Lloyds actually set aside money for this, but the numbers appear to be rising. In the nine months to September 2023, Lloyds recorded impairments of £849m. The figure for 2022 rose to £1.51 billion. If interest rates don't come down soon, this figure could continue to rise. Lloyds' next set of results will be published later this month and should reveal more.
Plus, with higher rates and inflation causing a cost of living crisis, people are finding it much harder to buy homes. This could impact performance as new business levels could drop.
my verdict
Weighing up the pros and cons, I think the Lloyds share price presents an opportunity at current levels.
I would quickly caveat this by saying that I would be willing to endure some short-term hardship for longer-term returns and growth. This is mainly because the economic outlook is still uncertain. Those with a lower tolerance for volatility may consider Lloyds a stock to avoid.
Personally, I'd be willing to buy Lloyds shares as soon as I have some extra cash. An excellent market position, a potential additional income stream with their build-to-rent plans and a passive income opportunity that seems relatively secure have helped me reach my conclusion.
