Lloyds (LSE: LLOY) shares have gone nowhere for ages. Suddenly, that’s changed. The FTSE 100 banking stock has jumped 16.96% in the last month, but still looks cheap trading at a lowly 6.4 times earnings.
I’m pleased and relieved to see my Lloyds shares on the up. I bought them last June and again in September at around 43p. With the share price now 48.63p, I’m up around 12%. Obviously, it’s not a Rolls-Royce or Nvidia-style return, but a month ago I was in the red.
I bought Lloyds because I thought its shares were undervalued and would recover nicely once inflation fell and the economic outlook brightened. We’re not there yet, but already the shares are pointing the right way.
FTSE 100 recovery stock
Despite the doom and gloom, I think the UK is moving into recovery mode. If inflation falls to 2% in April, as markets expect, that will give everyone a lift. The latest Halifax house pricing index, published on Friday, showed property prices rising for the fifth consecutive month. This should boost Lloyds, as the UK’s biggest mortgage lender.
The share price got its first sizeable boost on 16 February, when rival NatWest Group posted a better-than-expected 20% rise in pre-tax profits to £6.17bn. Investors expected crossover when Lloyds published its full-year results six days later, and so it proved.
Pre-tax profits jumped 57% to £7.5bn, the highest in 20 years. The key metric of the net interest margin, which measures the difference between what banks pay savers and charge borrowers, rose 17 basis points to 3.11% over the year. The board lifted the full-year dividend by 15% to 2.76p a share. It now yields a juicy 5.68% with the promise of more to come.
There are still risks
Lloyds isn’t out of the woods yet. Net interest margins actually fell in Q4, to 2.98%. Once interest rates are cut, margins could narrow further. Another concern is that the Financial Conduct Authority is investigating a potential car finance scandal, which could affect the bank’s Black Horse loans division.
Lloyds has set around side around £450m for compensation claims but with campaigner Martin Lewis making a lot of noise, that may not be enough. The PPI scandal cost Lloyds £21.9bn, remember.
It’s a worry its investors don’t need, but it won’t persuade me to sell. I’m hoping to hold my shares for a decade or two, and over such a long period there will always be ups and downs. Yet I’m not planning to buy more. From recent experience, the share price could easily give up its gains. I may get another chance to buy at a lower price than today.
I’m happy with my existing exposure and will leave it to compound and grow, while targeting other dividend income stocks on my hit list. There are plenty of cheap high-yielders on the FTSE 100 today. I just wish I had the money to buy all of them.
This post was originally published on Motley Fool
