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After years of stagnation, the Lloyds (LSE:LLOY) The share price is finally giving investors something to cheer about. And I think there's more excitement to come.
Lloyds shares stagnated for years after the 2008 financial crisis as the traumatized banking sector tried to rebuild itself. There was the occasional increase in the share price at that time, but it never led anywhere.
The pain lasted too long. Lloyds had returned to paying dividends. The yield had exceeded 5%. The company was making billions. Its shares were very cheap and were trading at five or six times earnings. However, investors didn't want to know.
FTSE 100 recovery stocks
I finally decided that this could not continue and bought the shares last year. I am glad I did.
The share price is up 28.35% over the past 12 months. With dividends added, the total return is close to 35%. And I think this is just the beginning.
I thought Lloyds shares would rise sharply when central bankers finally started cutting interest rates, but that hasn't happened yet.
This means investors can still earn returns of up to 5% on cash and bonds, while taking little to no risk with their capital. This makes dividend stocks seem a little less tempting, because the risks are higher.
When central banks, such as the US Federal Reserve and the Bank of England, finally decide that they have beaten inflation, they will start cutting interest rates. At that point, cash and bond yields will fall, but the yield on Lloyds will not – quite the opposite.
Today, Lloyds shares have a residual yield of 5.04%. It is projected to reach 5.37% in 2024 and 5.9% in 2025. At that time, savings rates and bond yields could head towards 3%.
Ideal for dividend income
When that happens, money should rotate into stocks like Lloyds. And the stock price should go up, if I'm right. As always when investing, there are no guarantees.
Falling interest rates will not always be good news. This will reduce Lloyds' net interest margins – the difference between what it charges borrowers and what it pays savers. This is a key measure of the company's profitability, and it has already started to narrow.
However, lower rates will be good news for banks in other ways, reducing debt impairments, reviving the housing market and putting money in people's pockets. Moreover, the UK economy is also growing faster than expected.
There are other risks. We still don't know how the vehicle finance mis-sales scandal will be resolved. Lloyds has set aside £450m to cover compensation costs. You could have to pay much more.
However, taking a long-term view, I think the stock still looks like a good value trading at 9.52 times forward earnings. It's not as cheap as when I bought it last year, but I'll still be topping up my bet when I have the cash. I find it impossible to resist the rising yield and recovering share price.
