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Should I buy Lloyds shares?

Young Caucasian woman at the street withdrawing money at the ATM
Young Caucasian woman at the street withdrawing money at the ATM

I’ve got a bit of spare cash in my trading account and I’m thinking of using it to buy Lloyds (LSE: LLOY) shares. I feel this is an exciting time to buy top FTSE 100 stocks, because so many are trading at rock bottom valuations. It’s also risky, given that GDP shrank 0.2% in the three months to September.

I will mitigate that risk by spreading my money across a number of stocks in different sectors and staying invested for a minimum 10 years. That should allow plenty of time for my stock picks to recover from today’s volatility.

Lloyds shares look cheap to me

So far, I have focused on picking up dirt-cheap FTSE 100 shares punished by the market, but may be over the worst. Housebuilder Persimmon and mining giant Rio Tinto were both trading at less than five times earnings when I bought them, while paying double-digit yields. My other pick, Rolls-Royce, had crashed 75% in five years.

Lloyds has a similar profile. Its stock has fallen 12.13% over 12 months, and 35.06% over five years. It is also dirt-cheap, trading at 5.8 times earnings. The price-to-book value is just 0.5, well below 1.0 considered fair value.

Lloyds doesn’t offer the highest dividend yield on the FTSE 100, but will still pay me a passive income of 4.6% a year. Crucially, that is covered 3.8 times by earnings (twice is usually considered sufficient). This fills me with hope that management will progressively increase payouts to shareholders. The forecast yield is now 5.7% and cover still looks strong at 2.9 times.

It is vital that management stands behind the dividend, because this is the prime reason investors hold the stock. Lloyds shares have gone nowhere for a decade.

Lloyds is almost entirely focused on the UK market, and has suffered in this dismal year for our economy. Q3 pre-tax profits plunged 26% to £1.5bn as loan impairment charges rocketed from £119m to £668m year on year.

This looks like a top FTSE 100 buy

That more than offset the 12% rise in net income to £13bn. The increase was largely down to higher interest rates. They allow Lloyds to widen net interest margins, the difference between what it charges borrowers and pays savers.

The bank’s small businesses and personal customers are facing an almighty squeeze as inflation, taxes and borrowing costs surge. The real crunch is yet to come.

Yet if I wait until everything is hunky-dory before buying Lloyds shares, I am likely to pay a lot more than today’s low entry price of 43.55p. I’m also wondering whether the doom has been overdone. Mortgage rates may not rise as much as expected just a couple of weeks ago, and that could ease the pressure on homeowners.

If chancellor Jeremy Hunt imposes a new windfall tax on banks in his autumn statement on Thursday, that would hurt. The signs are he won’t. I might wait until after he has sat down before buying Lloyds shares. But I will buy them. I’ve been thinking about it for long enough.

The post Should I buy Lloyds shares? appeared first on The Motley Fool UK.

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Harvey Jones holds shares in Persimmon, Rio Tinto and Rolls-Royce. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022