Lloyds shares are up 6% in 2023. Do I buy more?

Although Lloyds Banking Group (LSE: LLOY) shares have had a tough few years, they have rebounded strongly since the weakness of October. Also, they are up almost 6% in the first week of 2023. So should I buy more, or wait for this stock to drop again?

Long play

Here’s how the stock performed over the short and long term:

Lloyds stock fell by almost a tenth in the past year and has lost almost a third of its value in the past half-decade. That’s a pretty poor performance, given that FTSE 100 the index is down just 1% over the past five years.

Then again, that figure doesn’t include cash dividends, which would boost Lloyds’ returns by a few percentage points a year. Even so, I would conclude that this Footsie stock has been disappointing for a long time.

Are stocks still cheap?

Over the last 12 months, Lloyds’ share price has ranged from a high of 56p on January 17 last year to a low of 38.1p on March 7 (two weeks after Russia invaded Ukraine). Currently, the stock is slightly above the midpoint of its one-year range.

At current share prices, the entire Black Horse group has a market value of £32.3bn. To me, that’s a pretty modest price for a business with 26 million customers and many well-known financial brands.

What’s more, the bottom line of Lloyds seems to be wanting to me. Shares trade in a price-to-earnings ratio of 7.9, versus over 14 for the FTSE 100. This translates into earnings of 12.6% – almost double that of Footsie.

But what prompted my wife and I to buy Lloyds shares for our family portfolio in June was their market-beating dividend yield. Currently, this is 4.4% a year, which is slightly above the cash yield of the FTSE 100. Even better, this payout is guaranteed 2.8 times by the group’s earnings, leaving lots of room for future increases.

Lloyds could face a tough 2023

Then again, dark clouds are gathering on the horizon for Lloyds and other major lenders. Economists are predicting a nasty UK recession this year, as consumer spending falls due to disposable income.

In addition, the toxic combination of soaring inflation, sky-high energy bills and rising interest rates is likely to send loan losses and bad debt soaring. However, Lloyds has a solid balance sheet packed with high-quality liquid assets. And the Common Equity Tier 1 (CET1) ratio – one of the main measures of financial strength – is 15%, well above the group’s target.

So would I buy Lloyds shares at current levels? My answer is no, but it’s actually because we already have stock that we bought at a lower price. Furthermore, we would not sell anywhere near the current stock price. Indeed, we intend to hold these value stocks for their long-term potential for dividend income and future capital gains!