Lloyds Banking Group20 Jan 2024 05:19
Published on 18 January 2024
A large part of the investment case for Lloyds is its heavily discounted valuation, which is currently sitting well below its long-run average.
The depressed valuation has pushed the forward dividend yield up to an attractive 7.0%. Backed by a strong balance sheet, we think this creates the potential for further returns from share buybacks too. But remember, no returns are guaranteed and yields are not a reliable indicator of future income.
Lloyds' focus on traditional banking does make it more exposed to the traditional interest rate cycle than others – 73% of total income was from interest at the last count. With its interest income booming over the past year or so because of rising rates, things seem to have peaked.
Mortgages issued over the pandemic are coming up for renewal at less profitable levels too. This has been a headwind heading into 2024 but should tail off towards the end of the year.
The main drawback of Lloyds' business model tends to be the higher-than-average exposure to potential loan defaults. But with no real uptick in arrears, even these have stayed lower than many first thought. That might change, but the economic outlook is starting to show signs of improvement – with unemployment rates holding firm, house prices stabilising and real wages rising.
Lloyds boasts one of the higher quality mortgage portfolios, which we see as more resilient than most peers. There’s also the benefit from the structural hedge to come through – think of this like a bond portfolio that’s set to roll onto better rates in the coming years. This looks set to boost income over the medium term.
We see the group’s depressed valuation as an attractive entry point. Lloyds is our preferred name in the sector, given what looks to us like a stronger operation than some peers. But it’s not immune to economic uncertainty, so be prepared for a bumpy ride.
https://www.hl.co.uk/news/articles/uk-equity-income-3-share-ideas-for-dividends?
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