Lloyds (LSE: LLOY) shares have had a bumpy time of late and now trade 25% lower than they did five years ago.
They have fallen almost 3% this morning, and are currently available at just 48.48p. Less than 50p per share looks like a bargain price to me, and offers plenty of potential upside once Lloyds gets its act together.
Plenty of investors will have come to the same conclusion over the last five years, only to be disappointed. Could this time be different?
Recent performance is poor
Lloyds shares have been a losing bet for a quarter of a century. They actually hit their all-time high of around 485p way back in April 1998.
By February 2007, they had recovered to around 300p, only to crash to 20p after the financial crisis. The last year has offered some respite, with the stock climbing 13.29%.
I was pleased to see Lloyds come through the recent banking crisis largely unscathed. The bank is a much less risky proposition than it used to be, as it focuses on the nuts and bolts of personal and small business banking.
It looks cheap today, valued at 6.8 times earnings, with a price-to-book ratio of 0.7 (a figure of 1 represents fair value). That appears to offer some upside growth, and I wouldn’t be surprised to see Lloyds shares climb above 50p over time, and stay there.
I wouldn’t buy Lloyds for share price growth, though. I’d buy it for income. Here the story just gets better. Lloyds was banned from paying dividends after its £20bn bailout by the government in 2008, but has been steadily repairing them in recent years.
Currently, the shares yield 4.8%, comfortably above the FTSE 100 average of 3.5%. Better still, that is covered three times by earnings, giving plenty of room for growth. Markets anticipate the yield to hit a pretty fab 5.89% next year.
I love these dividends
Even at that level, dividend cover should still be at 2.7, allowing for yet more progression. Whisper it, but Lloyds is slowly turning into the fabled dividend machine of yore.
Inevitably, it comes with risks. The banking crisis could return with a vengeance, and some hidden nasty shock could emerge to threaten Lloyds. If house prices crash and customers default, it could be forced to repossess properties and sell them at a loss. Should we get a recession, business customer debt impairments may rise too.
Lloyds may turn out to be a value trap, and its share price could idle for another 25 years. Despite the dangers, I believe this stock deserves a place in my portfolio as a long-term buy-and-hold.
I’d aim to reinvest my dividends while I’m working, and draw them as income when I retire. Even if the share price never climbs much above 50p, I should still get a pretty decent overall return on my investment.
I already hold a few Lloyds shares and I plan to buy more when I have the cash. I just hope they don’t rise too far before I’m ready to trade.
The post After falling 25% in five years, Lloyds shares cost less than 50p. Am I buying? appeared first on The Motley Fool UK.
Our analysis has uncovered an incredible value play!
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
7.2% and 5.6% yields! Should I buy these cheap FTSE 100 shares for passive income?
Lloyds shares are under 50p. Is this a great investment opportunity?
2 cheap FTSE 100 shares I’m avoiding like the plague!
I’d buy 50,000 Lloyds shares for £100 in monthly passive income
Lloyds shares dived 20%, but are now bouncing back!
Harvey Jones has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.