Trade of the Day: Lloyds to 88p (with patience)

Lloyds has had a reasonable start to 2018, jumping close to 3% in the first few weeks of trading. This has taken the share price to 70.7p, which is substantially up from the 49p low after the Brexit referendum. The climb northwards has been a slow steady march, as Brexit uncertainties surrounding UK lenders have weighed on sentiment towards the likes of Lloyds and Barclays.

What: Lloyds has had a reasonable start to 2018, jumping close to 3% in the first few weeks of trading. This has taken the share price to 70.7p, which is substantially up from the 49p low after the Brexit referendum. The climb northwards has been a slow steady march, as Brexit uncertainties surrounding UK lenders have weighed on sentiment towards the likes of Lloyds and Barclays. 

However, these risks, in relation to Lloyds could now be considered overdone. For many, Lloyds is seen as the healthiest of the UK banks, especially when taking into account the bumper dividend. The current dividend is 3.8%, on par with the FTSE average at the end of 2017. Furthermore, the dividend is set to increase in 2018 to 4.71p which would be a 6.6% yield – something to get excited about. 

Given the potential plus 6% yield on Lloyds, UBS have said that they believe there is a potential 26% share price increase on the cards and have placed Lloyds as the preference buy among 7 other European Banks – this is significant given the more favourable conditions on mainland Europe. Other banks on the list include Soc Gen, Credit Suisse, ING, Danske Bank and Santander. 

It is worth keeping in mind that the dividend forecast is based on the expectation that capital requirement does not increase above previous requirements. 

When looking at the intrinsic value of Lloyds, we can see it is still relatively cheap. The intrinsic value is 88p, roughly 25% higher from where the price is now. 

Finally, the other interesting point about Lloyds is that the share price is relatively stable compared to the rest of the market ie it has a relatively low beta. This means this stock lends itself to a longer-term trade rather than a day trade and should it rise, then there is a smaller chance of volatility bringing it down again. Low beta generally means low risk, but patience is needed.

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