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Over the past two years, Lloyd’s (LSE:LLOY) stocks have been volatile. Over the past three months they have been relatively stable under 50p. In a climate of rising interest rates, however, could the stock be a bargain? Let’s take a closer look.
Strong earnings growth and low P/E ratio
The FTSE100 the company is showing strong long-term growth. Between 2017 and 2021, for example, earnings per share (EPS) increased from 4.4p to 7.5p.
By my calculations, this translates to a compound annual growth rate in EPS of 11.25%. It’s something that I find really very appealing.
As attractive as this growth is, the company also paid a dividend of 2 pence per share in 2021. At current levels, this equates to around 4.3%. It’s nice to know that I could pull in a stream of income while potentially enjoying growth.
I am also of the opinion that Lloyds shares can be cheapwhether or not they are down or not.
As far as price/earnings (P/E) ratios are concerned, I can get a glimpse of the proportion of earnings relative to the current stock price. Lloyds has a forward P/E ratio of 6.61, lower than its peers HSBC and Town. It is also below the UK banking sector average, which is between 13 and 15.
To that end, I’m confident that buying at the current stock price could provide good value for money.
Rising interest rates, rising share price?
The share price struggled to break above 50p, and for a long time I thought this presented good value. For several months, the banking giant has benefited from a climate of rising interest rates.
In the UK, rates climbed to 1.75%. Although this is still historically low, they are increasing. In fact, Citi recently published research indicating that it expects UK inflation to hit 18% next January. It is therefore quite conceivable that interest rates will continue to rise.
In the United States, Federal Reserve Chairman Jerome Powell has hinted that they will recover before the end of the year.
This is generally good news for Lloyds, as it makes it possible to charge more for borrowing facilities.
However, it can also have a chilling effect on potential customers who may find loans too expensive to justify.
The company has already posted improved results due to this broader economic trend. For the six months to June 30, the company recorded a 13% increase in net interest income. This is the difference between the amount paid for customer deposits and the amount charged for loans.
This is a strong suggestion that the rate hike is a financial advantage for Lloyds. So I find it curious that the share price did not go above 50p. It might start climbing soon.
Overall, I think Lloyds shares can provide value at 46p, based on the forward P/E ratio. Add to that the historic earnings growth, revenue potential and rising rates, I think this could be a good investment for my portfolio. I will add the shares soon.