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Lloyds (LSE: LLOY) shares have failed to excite in recent times, with the stock down over 20% in the last five years. Racing inflation and falling investor confidence in 2022 saw it continue to suffer as shares in the FTSE 100 bank fell 14%.
Despite this, 2023 has seen Lloyds rally. Up by 12%, a strong start to the year has seen it nearly reverse all its losses from last year.
So, is now the time to be snapping up Lloyds shares? I think so. Here’s why.
Why the rally?
One of the main reasons for the recent spike in the Lloyds share price is rising interest rates. With the Bank of England (BoE) recently hiking rates to 4%, Lloyds has benefited from this.
This is because higher rates allow the business to charge customers more when they borrow, in turn boosting net interest income. For Q3, its underlying net income was up 15%, fuelled by growth in the net interest margin. And with growth projected at 23% in net interest income for its upcoming Q4 results, it’s clear to see why investors have been keen on the stock year to date.
Looking ahead, while many think that interest rates are near their peak, it’s predicted that they could jump a further 25-50 basis points in 2023. With this in mind, the business looks set to continue to benefit in the months ahead.
Not all good news
While Lloyds stock has jumped this year due to the BoE’s attempts to curb inflation, rate hikes are a double-edged sword. Higher interest payments may see customers default on loan payments. Clearly, this is bad news for the bank.
Lloyds is also more susceptible to a weakening UK economy giving its greater domestic focus compared to its competitors. With the UK economy already in trouble, and with 2023 set to be choppy, Lloyds could suffer as a result.
Despite this, I like the stock due to its dividend yield. Figures released yesterday revealed that inflation had eased for the third month in a row to 10.1%. With a 4% yield, while it’s not inflation-beating, the passive income generated from Lloyds stock offers me a partial hedge. With rates not set to come down to a more respectable level for the foreseeable future, buying Lloyds makes sense.
The stock also has a low valuation. With a price-to-earnings (P/E) ratio of around 8.7, this sits comfortably below the FTSE 100 average of around 14. It also has a forward P/E of just 7.
Should I buy?
I’ve been tracking Lloyds shares for a while. And I recently decided to bite the bullet and add the stock to my portfolio. Its low valuation and high dividend yield make it an attractive proposition. And despite the threat of a weak UK economy, hopefully, the gains seen from high interest rates will allow Lloyds to offset this.
When I last bought Lloyds stock, I thought I had enough exposure. However, with its upward trajectory and at its current price of around 53p, I still think it’s attractive. With this in mind, I’ll be looking to top up my holding in the weeks ahead.
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