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Lloyd's (LSE:LLOY) shares have gone nowhere for years. Suddenly, that has changed. He FTSE 100 Bank shares are up 16.96% in the last month, but still appear to be trading cheap at a modest 6.4x earnings.
I am pleased and relieved to see that my Lloyds shares have gone up. I bought them last June and again in September for around 43p. With the share price now at 48.63p, I'm up around 12%. Obviously, it is not a Rolls-Royce either NVIDIA-Return style, but a month ago it was in the red.
I bought Lloyds because I thought its shares were undervalued and would recover well once inflation fell and the economic outlook improved. We are not there yet, but actions are already pointing in the right direction.
FTSE 100 recovery stocks
Despite the pessimism, I believe the UK is entering recovery mode. If inflation falls to 2% in April, as markets expect, that will benefit everyone. The latest Halifax House Price Index, released on Friday, showed property prices rising for the fifth consecutive month. This should boost Lloyds as the UK's largest mortgage lender.
The share price got its first significant boost on February 16, when its rival NatWest Group posted a better-than-expected 20% rise in pre-tax profits to £6.17bn. Investors were expecting a crossover when Lloyds published its full-year results six days later, and so it was.
Pre-tax profits rose 57% to £7.5bn, the highest level in 20 years. The key metric of net interest margin, which measures the difference between what banks pay savers and what they charge borrowers, rose 17 basis points to 3.11% over the year. The board increased the annual dividend by 15% to 2.76 per share. Now it yields a juicy 5.68% with the promise of more in the future.
There are still risks
Lloyds is not out of the woods yet. In fact, net interest margins fell in the fourth quarter, to 2.98%. Once interest rates are lowered, spreads could tighten further. Another concern is that the Financial Conduct Authority is investigating a possible car finance scandal, which could hit the bank's Black Horse lending division.
Lloyds has set aside around £450m for compensation claims, but with campaigner Martin Lewis making so much noise, that may not be enough. Remember the PPI scandal cost Lloyds £21.9bn.
It's a worry your investors don't need, but it won't convince me to sell. I hope to hold my shares for a decade or two, and over such a long period there will always be ups and downs. Still I don't plan to buy more. Based on recent experience, the stock price could easily lose its gains. Maybe you will have another opportunity to buy at a lower price than the current one.
I'm happy with my current exposure and will let it compound and grow, while I look to other dividend income stocks on my target list. There are lots of cheap high yield stocks on the FTSE 100 today. I just wish I had the money to buy them all.
