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Despite a strong start to the year, Lloyds (LSE: LLOY) shares have struggled in recent times following the issues we’ve seen in the financial sector and the impact they’ve had on investors’ confidence.
In the last month alone, the stock has dropped by over 6%. More widely, the last five years have been pretty bleak, with the FTSE 100 bank down over 25%.
Despite this, with the stock trading hands below the 50p mark, I think now could be a smart time to snap up some shares. Here’s why.
Rate hikes
While inflation has wreaked havoc in the market for the last year or so, Lloyds has benefited from the rises in interest rates that have been put in place as a result.
With inflation continuing its surge in the UK (figures for February came in hotter than expected), the Bank of England has been tightening its monetary policy, with the base rate now at 4.25%.
Lloyds has been a beneficiary of this, as higher rates have allowed the bank to charge customers more when borrowing. For 2022, its underlying net interest income jumped by 18%. And with the Bank expected to hike rates until at least the summer, Lloyds should continue to reap the rewards.
Inflation concerns
That said, higher inflation isn’t all good news for the business.
First, with inflation still sitting above 10%, the UK is faced with the constant threat of a recession. Clearly, this wouldn’t be good news for Lloyds. And with its sole focus on the UK, it’s at risk more than many of its competitors.
Second, while it’s benefited from the BoE’s actions, higher rates mean it’s more likely that customers might default on loan payments. Again, this could have a detrimental impact on Lloyds’ performance in the near future.
The positives
Despite this, there are still plenty of reasons to like Lloyds.
The stock offers a dividend yield of nearly 5%. And with inflation not expected to fall back to average levels until later this year, the passive income generated from investing in it could come in handy.
The stock also looks cheap to me. It currently trades on a price-to-earnings ratio of under 7, which is around half that of the FTSE 100 average.
On top of this, I also think the business is safe from the troubles we’ve seen in the past few weeks with other banks. Its CET1 ratio, which compares its capital against its risk-weighted assets, sits at 14.1%, above its 12.5% target.
Lloyds also has plenty of cash available, highlighted by its recent announcement of a £2bn buyback scheme.
So is the stock a bargain?
At under 50p, are Lloyds shares a bargain in that case? I think so.
The bank is set to continue to profit in the months ahead if interest rates continue to rise. And with its strong dividend yield and low valuation, I deem it a smart buy.
I already own Lloyds shares. And while I’d be keen to top up my holdings at its current price of 48p, I don’t have the spare cash at the moment. Should this change in the near future, I’ll most certainly be rushing to buy some more shares!
