Lloyds shares might be losing some momentum heading into the end of summer, however the stock still offers some value in the face of economic uncertainty.
Lloyds has a share price of 44.5p and has fallen 6.8% year-to-date, marking a potential opportunity to swoop in and grab the banking share at decent value.
The stock has a current PE ratio of 5.7 and a forward PE ratio of 6.1, suggesting a slight decline in earnings going forward.
However, Lloyds also has a generous dividend yield of 4.5% and a highly sufficient dividend cover of 3.9, providing capacity for shareholder payouts even in a turbulent market environment.
The banking giant lifted its FY 2022 guidance on its strong HY1 2022 results, including a banking net interest margin expected in excess of 280 basis points from 277 basis points, alongside a return on tangible equity projection of 13%.
Interest rates
The Bank of England is expected to hike interest rates further in an attempt to tame soaring inflation, however this double-edged sword could cut down some of Lloyds shares’ appeal.
Interest rates are likely to rise beyond the current level of 1.75%, and all eyes will be on the Jackson Hole convention this week to see which direction US Federal Reserve chair Jerome Powell will go, potentially setting the tone for the Bank of England at its next interest rates meeting, too.
Rising interest rates mean higher charges for loans, including mortgages, of which Lloyds currently stands as the UK’s largest lender.
However, the cost of living crisis is becoming intense, more sectors are going on strike, consumers are looking at inflation estimates as high as 18% according to Citibank, and Lloyds could be facing a massive volume of defaults and a housing market which is showing signs of a slowdown.
The Nationwide Housing Price Index for July reported a rise in yearly house price growth to 11% against 10.7% in June, displaying a surprising level of momentum for the housing market despite rising inflation.
“Demand continues to be supported by strong labour market conditions, where the unemployment rate remains near 50-year lows and with the number of job vacancies close to record highs,” said Nationwide chief economist Robert Gardner.
“At the same time, the limited stock of homes on the market has helped keep upward pressure on house prices.”
However, Garden also mentioned the hike in interest rates would eventually catch up to mortgage demand, cooling consumer interest in purchasing homes as the cost of living crisis bites.
“We continue to expect the market to slow as pressure on household budgets intensifies in the coming quarters,” said Gardner.
“Moreover, the Bank of England is widely expected to raise interest rates further, which will also exert a cooling impact on the market if this feeds through to mortgage rates.”
Conclusion
The housing market slowdown does attach some risk to Lloyds shares, however the return on loans on higher interest rates, alongside the bank’s strong financial results, generous dividend yield and secure dividend cover, make Lloyds shares a reasonably well valued company for longer term investors.
