Lloyds (LSE: LLOY) shares are currently trading for around 45p, well below their pre-pandemic levels. The stock has fallen 3% in the last 12 months, and given the macroeconomic circumstances, this isn’t too bad, in my opinion. However, it’s failed to excite over the last five years as it’s dropped by over 30%.
Despite this, at its current price, I see an opportunity. Regardless of the multiple issues that 2022 has thrown our way, here’s why I’m seriously considering adding the FTSE 100 bank to my portfolio.
Let’s start by addressing the most obvious issue surrounding Lloyds right now. Interest rates.
Last week it was announced by the Bank of England (BoE) that rates were set to be hiked by 0.5%, signalling the biggest increase in 27 years, as the BoE made the bold prediction of 13% inflation by the end of the year.
Its aggressive hike followed in the footsteps of the European Central Bank and US Federal Reserve. And for Lloyds, it means two things.
Firstly, higher rates may be bad news for the business. This is because it may see more customers defaulting on payments.
However, this hike also presents an opportunity. With higher rates, the firm is able to charge lenders more when they borrow from it. This should help boost its revenues in times ahead.
I’m also considering other factors when looking at Lloyds shares.
One pull is its dividend yield. With inflation spiking to 9.4% in the UK for June, a fresh 40-year high, its 4.7% yield offers me some protection against my cash losing value. While it’s not inflation-beating, it does top the average FTSE 100 yield of between 3% and 4%. Further, its price-to-earnings ratio of 7.5 signals to me that Lloyds’ shares could be undervalued.
The business also updated investors late last month with its half-year performance. For the period, net income rose 12% year on year to £8.5bn, while its loans and advances to customers were also up £7.5bn across the year.
More widely, Lloyds also enhanced its full-year outlook, including raised guidance for its net interest margin. Given the macroeconomic conditions, these are positive signs and highlight its strength.
With the housing market also hitting the brakes, this could prove to be an issue for the bank. However, with the moves it’s making in the rental market it should be able to offset this. The entry into this market will diversify the firm’s income streams. And with it predicting that demand is set to increase over the next five years, I think this could be a good move. By the end of the decade, Lloyds plans to purchase nearly 50,000 homes.
So, despite the potential risks of rising interest rates, and the slowdown we’ve seen in the housing market, I’d buy Lloyds shares today. Its positive results in these tough times show the quality of the business. And its dividend yield is a further bonus. At 45p, I’d happily add the stock to my portfolio.
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Charlie Keough has no position in any of the shares mentioned. 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.