Lloyds shares have recovered from the mini-banking crisis but are still significantly below their recent highs. With the Lloyds share price hovering below 50p, many will be considering buying the stock at these levels.
Here are two reasons why.
Lloyds dividend
The Lloyds dividend is becoming increasingly attractive. After many years of pitiful payouts following the financial crisis, Lloyds dividend has steadily increased to now yield 4.9%.
The bank hiked their 2022 full-year dividend by 20% demonstrating a willingness to bolster shareholder distributions. One would expect this policy to continue in the future. The dividend is well covered, leaving plenty of space for higher dividends without causing too much pressure on cash generation.
Lloyds profit doubled last year and key profitability measures such as net interest margin are expected to be steady in the year ahead.
The favourable dividend will make Lloyds a cornerstone position in the income portfolios for many investors.
Valuation
The capital appreciation prospects for the Lloyds share price are clear. However, the outlook for the UK economy may make the journey to substantial gains for Lloyd shares a bumpy one with a number of risks to consider.
The mortgage market is improving but many economists are predicting a slowdown in the UK housing market. A material decline in housing activity will be a concern for Lloyds mortgage and lending business and may lead to more impairment charges.
Nonetheless, on a historical basis, Lloyds trades at an attractive PE Ratio of 6.2x. Lloyds Price-to-book ratio is just 0.7x. These are valuations that are hard to ignore.
One should remember, there has been an ongoing distortion of UK banking valuations compared to US and European peers since the pandemic. This makes Lloyds current value seem cheap not only to the FTSE 100 average but good value on a relative basis compared to international peers.
Should Lloyds rerate in line with either the FTSE 100 average or international peers, the upside from here would be outstanding.
The big question is how long this disconnect from peer valuations persists.