Business & Investment

Lloyds Stock: Is It What I Need for My Portfolio?

I was looking for cheap UK stocks to add to my portfolio.One of the outstanding investments Lloyds (LSE: LLOY) Stock price.

The stock of this bank giant looks cheap. They are currently changing hands around 34p. This is compared to the 58p level recorded at the end of January last year.

However, just because a share looks cheap compared to its history does not guarantee positive performance in the future.

Attractive traits of Lloyds’ stock price

There are several reasons why I like Lloyds compared to other British banks. First, banking groups are very profitable. For 9 months until the end of September, the group Return on tangible shareholders’ equity (RoTE) of 7.4%..

RoTE is a very commonly used indicator in the banking sector. It looks at how much profit a company makes for every pound of tangible or physical assets. Both of the group’s major peers, Barclays And NatwestReported a lower RoTE than Lloyds in the first nine months of last year.

Lloyds also recorded an impressive capital adequacy ratio at the end of September last year. The group’s CET1 ratio, which measures the amount of capital available for banks to absorb losses and lend to clients, was 15.2%. This is well above the 13.8% level recorded in early 2020.

Future risks

These numbers suggest to me that Lloyds is more profitable than their peers. It also means that the bank’s balance sheet is healthy. Unfortunately, this does not guarantee that Lloyds’ stock price will be a good investment. If the UK economy turns to the worst, lenders’ profit margins can collapse and increased losses can cut into capital adequacy ratios.

Forecasters warn that the economy is facing uncertain months due to a pandemic. Unemployment is rising and the blockade continues, which could lead to hundreds of thousands of unemployment in the hospitality sector in the coming months.

So I think Lloyd’s historical profitability figures should only be used as a rough example. They are certainly not a guide to future performance, whether short-term or long-term.

Nonetheless, Lloyd’s share price may offer an opportunity in my opinion as a way to play a post-pandemic economic recovery.

As some analysts suggest, if the pandemic begins to recede in the summer, the reconstruction process can begin. In that case, the group could increase lending, which would lead to increased profits.

Energizing business activities also leads to improved profitability. Many business customers in banks pay for services based on the number of transactions. Therefore, an increase in trading volume leads to an increase in profits.

Therefore, I think Lloyds’ stock price is worth considering as part of a well-diversified portfolio as a way to invest in the UK economic recovery. Still, as mentioned above, there is no guarantee that the economy will recover. That’s something I should keep in mind.

However, Lloyds has a strong balance sheet at this point and should be able to survive the storm, although additional losses could put pressure on the lender’s capital reserves. That is something I will continue to pay attention to.

Rupert Hargreaves does not own the mentioned share. The Motley Fool UK recommends Lloyds Banking Group and Barclays. The views expressed about the companies mentioned in this article are those of the author and may differ from the official recommendations made by subscription services such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, by considering different insights, Better investors than us.

Lloyds Stock: Is It What I Need for My Portfolio? Lloyds Stock: Is It What I Need for My Portfolio?

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