3 reasons to buy Lloyds stock cheap today

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If we’re talking about buying Lloyds Banking Group (LSE:LLOY) stock today, thinking that it’s cheap must be a pretty good reason, right?

Well, the share price does look very low, especially after the recent fall.

Quality counts

But on its own, no, I don’t think so. Remember what Berkshire Hathaway boss Warren Buffett said?

It’s much better to buy a good company at a fair price than a fair company at a great price.

Letter to shareholders, 1989.

While a good cheap rating is great, I see it only as a bonus. I mean, I once bought a stock that I thought was really cheap. And then lose money on them.

The companies turned out to be nothing out of the ordinary. But what three things might make me think of that Lloyds?

Finance

First, I want to look at financial stability. When the economy is in a bad state, banks in particular can suffer. I don’t think any investor will forget the massive 2008 bank crash any time soon.

On that front, Lloyds just released its scores for the Bank of England (BoE) stress test for 2022. The test puts the bank’s balance sheet under a severe test of economic stress.

I’m not going to go into all the numbers. But Lloyds says it “comfortably passes” the test. And it doesn’t have to take modal action.

Financial stress can still be the biggest risk this year. But the BoE is happy, and I think that’s a good sign.

Important

Next, I want to look at the essential goods or services. And I want a good cover trench with high barriers to entry. Have I squeezed two things into one here? Maybe, but I hope the reader will forgive me.

England cannot work without banks. And I think that makes the financial sector one of the most important that exists today. Think food is more important? Without a financial system, how can it get from the fields to our plates?

Banks’ large capitalization also keeps them fairly safe from newcomers, I would say. We saw the rise of challenger banks after the big crisis. But even though the big players are reeling, new rivals are still making few real inroads.

Dairy cows

All of this is useless if a company does not generate cash for its owners. Dan Lloyds has a long track record of paying for many items.

Sure, it’s had its share of hard times, and there may be more. Signs of bad debt problems can put a bit of a strain on cash, especially since Lloyds has enormous exposure to mortgages.

That could hurt dividends. And that, in turn, could scare investors away again and Lloyd’s stock could fall again.

Extraordinary

But despite the obvious economic risks in 2023, I think Lloyds fits Buffett’s criteria. I think this could be a great long term buy for investors who understand the risks.

And it’s a really nice bonus to see Lloyds stock for what I think is a pittance.