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Last month, Lloyds Banking Group (LSE:LLOY) reported pre-tax profits of £7.5bn for 2023. Despite this, the shares are still 1% lower than at the start of the year.
If I had invested £1,000 at the beginning of January, my investment would have a market value of £990 today. But I think the prospects for the company are quite good.
Shareholder profitability
Lloyds plans to use a good portion of its windfall to reward shareholders. Some £2bn of this will come from a share buyback programme.
At current prices, this could reduce the number of shares outstanding by 6.6%. This is significant for a company that also achieved a 5.63% reduction in 2023.
In addition to this, a significant dividend is also offered. Investors who buy shares before April 11 will receive 1.84 pence (around 4% of the current share price) in May.
As an investor thinking about buying stocks today, I can see the path to a 9% return in pretty short order. And that makes Lloyds shares look attractive right now.
Interest rates
The real question is how long can it last? Interest rates – which have been contributing to profit margins across the banking sector – look set to fall at some point this year.
This seems like a risk to investors considering buying Lloyds shares and I think, on balance, it probably is. But there are also some reasons for optimism.
One is that the prospect of lower interest rates has been forecast for some time. And it appears to continue to retreat as the Bank of England prioritizes reducing inflation.
Another is that, other things being equal, lower interest rates reduce the chance of defaulting on loans. This helps offset another major risk for the bank right now.
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Overall, I think the £7.5bn the bank managed in pre-tax profits could be a one-off that I don't expect to be repeated any time soon. But investors can turn this windfall into a permanent boost.
At current prices, Lloyds can reduce its share count by 4.25 billion with its current buyback program. And that's a permanent reduction that should benefit shareholders indefinitely.
Investors can also get a lasting benefit from its unique dividend. By reinvesting it to buy more shares, they can ensure that their stake in the business increases permanently in the future.
To some extent, this should help offset the effect of lower earnings. That's why I think the rest of 2024 looks much better for Lloyds shareholders than the first few months.
An action to consider?
I think Lloyds shares look like a good investment at current prices. I'm considering adding them to my own portfolio in my Stocks and Shares ISA.
It seems to me that the stock market is treating last year's record profits as a one-off. While I think that's probably correct, as I said, shareholder returns could have a lasting impact for investors.
Interest rates remain a constant danger: too high and the risk of loan default increases; too low and the margins narrow. But I think there is a good margin of safety with current prices.
