Just under 10 years ago, Lloyds (LSE: LLOY) was trading at 590p per share and since then its valuation has fallen by 90%. Certainly, it has been even lower than today during that period, with Lloyds losing up to 93% of its value in the depths of the credit crunch. But its performance in recent months has hardly indicated that a comeback to 590p is on the cards.
In fact, Lloyds’ share price has slumped by 18% since the EU referendum. A key reason for this is that Lloyds is heavily focused on the UK economy and the uncertainty surrounding Brexit has caused investor sentiment towards the bank to come under significant pressure. The good news is that this is unlikely to last in the long run. The bad news is that uncertainty about the impact of Brexit on Lloyds is unlikely to subside in the short run.
That’s because the UK hasn’t even invoked article 50 of the Lisbon treaty yet. It will then take two years to negotiate the terms of its exit before leaving the EU at what is expected to be the start of 2019. During that time there’s likely to be a period of political posturing on both sides of the English Channel and this could cause Lloyds’ share price to underperform the wider index.
Huge potential
However, beyond that, Lloyds has huge investment potential. Part of the reason for that is the strategy that has been employed by the bank. Its balance sheet is stronger than most of its UK-based peers (as shown in the recent EU-wide stress tests) and it has benefitted from a process of asset disposals and efficiency measures that have left it more streamlined and increasingly profitable.
Furthermore, Lloyds’ outlook may be more upbeat than many investors currently believe. Clearly, the UK is at the beginning of what could prove to be the most uncertain period in many years. But countering this is a monetary policy that’s likely to remain favourable to Lloyds, since the Bank of England has already restarted its quantitative easing programme and reduced interest rates. This should increase demand for new loans and mean fewer defaults on existing loans.
With Lloyds trading on a price-to-earnings (P/E) ratio of 9.4, it offers excellent value for money and significant upward rerating potential. Although this may take time to emerge, in the meantime Lloyds offers a stunning income return. For example, in the next financial year it’s forecast to yield 5.8% from a dividend that’s expected to be covered 1.9 times by profit. This shows that the current level of dividends is sustainable and could rise at a rapid rate over the medium-to-long term.
But a price target of 590p per share is highly unlikely over even the long term as Lloyds faces a very different future than it did a decade ago. However, investors looking back on today in 10 years’ time may wish that they’d bought Lloyds as its future returns are likely to be exceptional.
