Lloyds Banking Group (LSE: LLOY) shares have delivered a surprisingly strong performance so far this year. I reckon that investors who added them to their portfolio at the start of January will be pleasantly surprised.
My sums suggest that a £5,000 investment on 2 January would be worth £6,284 today, including dividends. That’s a healthy 25.7% total return in just over nine months – from a boring FTSE 100 stock.
Can shareholders expect more gains going forward, or should investors be thinking about locking in a profit?
Why have the shares been falling?
The share price has slipped lower over the last month or so, after July’s half-year results left investors feeling flat. The problem is that as the UK’s biggest mortgage lender, Lloyds’ performance is linked to the health of the UK housing market. Interest rates are another big factor.
So far this year, market conditions haven’t been that strong. Housing activity’s been relatively depressed, while interest rates have flattened out and started to fall.
Customers have been moving their savings to higher interest rate accounts, while competition for new mortgage business has remained tough. As a result, Lloyds’ profit margin on lending – known as the net interest margin – has fallen.
The bank’s half-year results showed after-tax profit down by 17% to £2.4bn, compared to the same period last year.
There’s a risk that things could get worse too. If the UK economy slows, then the housing market could take longer to recover than expected. Profits could fall further.
Why I’m still keen
Billionaire investor Warren Buffett once said that “you pay a very high price in the stock market for a cheery consensus”. In other words, if you invest in the most popular companies, you’ll probably pay a high price.
I don’t think Lloyds is all that popular at the moment. That tells me there’s a chance the stock could be attractively priced. Looking at the numbers, I can see Lloyds trading on a 2024 forecast price-to-earnings ratio of 8.7, with a dividend yield of 5.7%. Those numbers look relatively affordable to me.
The bank’s profitability is another important indicator for me. Lloyds reported a return on tangible equity of 13.5% at the half-year market.
A bit of number crunching suggests to me that buying the shares at 57p might give me a theoretical 11.7% annual return, assuming performance remains unchanged.
A buy-and-forget stock?
That’s theoretical, of course. But the bank’s cash dividends are real and look safe enough to me. Broker forecasts suggest the payout will rise by 6% in 2025 to 3.5p per share. That’s equivalent to a cash yield of 6% at the current price.
The new government’s plans to boost housebuilding could also be favourable for Lloyds. I think it’s a near-cert that the bank will get a big chunk of any growth in mortgage lending.
Lloyds shares may not shoot the lights out. But I reckon that buying today is likely to deliver the kind of boring, steady returns that help me sleep at night. If I had space in my portfolio for a banking stock today, Lloyds would certainly be on my shortlist.
This post was originally published on Motley Fool
