One top reason to buy cheap Lloyds shares right now

Lloyds Banking Group (LSE: LLOY) shares have risen 33% since mid-October last year. Buying for potential recovery is more tempting, especially given the current low stock value.

The Lloyds share value forecast at a price-to-earnings (P/E) ratio of around 7.5. Analysts think the UK high-street bank worth only half long-term FTSE 100 average.

For a bank so closely tied to the long-term UK economy, I think it’s very cheap. And forecasts show prices falling further in the next few years.

But this is not the main reason to want to buy more Lloyds shares in 2023. No, the results of 2022 show the main attraction for me.

Dividends

Lloyds pays an annual dividend of 2.4p per share, up 20%. At current prices, that yields 4.7%.

The forecast sees the dividend yield reaching 6% in 2024 as well. I treat that with caution, of course. But the 2022 dividend is already three times covered by earnings. And Lloyds reckons capital generation should continue to grow between now and 2026.

Is Lloyds dividend a key feature for me? Well, kind of, but not all. I invest mainly for dividends, which I always reinvest for the long term. But there is something more fundamental behind it all.

Lost

Before I got too excited, there was always a risk with Lloyds. I know from experience, have made the first Lloyds investment in close to double the share price today.

Today’s high interest rates are giving a boost to bank profits. And for 2023, Lloyds expects a net interest margin above 3%. That’s high by long-term standards. And it should be affected when Bank of England rates fall.

Exposure to the housing market makes it even more risky, with Lloyds being the UK’s biggest mortgage lender.

Reason to buy

The one thing I am concerned about when it comes to banks like Lloyds is the generation of capital. Without it, there will be no dividend. And there is little to drive stock price valuations.

The Lloyds board has decided to return up to £2bn in reserve capital to shareholders by way of a share buyback, which has already started. That’s a lot of money, especially when the banking sector is supposed to be facing tough times.

This lends strength to the argument that Lloyds shares are currently cheap. After all, the company’s board will always find better ways to generate cash if it thinks its own stock is worth it.

Total yield

Regardless of how a company decides to pay its shareholders, total return is important. On that score, Lloyds’ total capital return for 2022 is up to £3.6bn.

This was in a year when the bank took £1.5bn in underlying disruption costs. And when the Board understands the current pressure on property prices and the future pressure of falling interest rates.

If that’s what Lloyds can do for its shareholders in something like 2022, I try to imagine what it can do when inflation is under control, UK economic growth is back, and disability is a thing of the past.