Lloyds share price: can it keep rising?

Lloyds Banking Group plc (LON: LLOY) has risen 30% so far this year. Is there more to come?

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The Lloyds Banking Group (LSE: LLOY) share price has gained about 30% already this year, making it one of the top performers in the FTSE 100.

Admittedly, this year’s gains have only reversed last year’s losses. But such a sharp rise in four months suggests a big improvement in market sentiment. Today, I want to explain why investors are buying Lloyds shares again and whether you should do the same.

Reasons to be cheerful

Lloyds’ shareholders were rightly pleased by the bank’s results in February. Pre-tax profit rose by 13% to £5,960m, while the dividend was lifted by 5% to 3.2p. Alongside this increase in the shareholder payout, chief executive António Horta-Osório announced a £1.75bn share buyback plan. As I’ve explained previously, this should help to support future earnings growth, even if market conditions weaken.

Although good news for shareholders, the results were broadly in line with analysts’ estimates. One positive was the group’s confident outlook statement, which confirmed further improvements in the bank’s profitability are expected in 2019.

Buy, sell or hold?

Analysts’ consensus forecasts for the current year have edged about 2% higher since Lloyds’ results were published in February. But, in my view, the stock’s gain has been driven by the market rebound and a lack of bad news. Nothing significant has really changed since the shares hit 50p in December.

With the stock now trading at about 65p, is Lloyds still a buy? The stock offers a dividend yield of 5.3%, which is roughly what I’d want from a mature bank stock. Earnings are expected to edge higher this year and the shares are valued at about 1.2 times tangible book value, which seems about right to me.

I think Lloyds remains a long-term income buy, but I don’t see the shares as a bargain.

A potential bargain

One FTSE 100 stock I think could be a bargain is insurance group Aviva (LSE: AV). The firm was without a chief executive between October and March and its share price has suffered.

However, February’s full-year results convinced me its performance remains healthy. Operating profit rose by 2% to £3,116m and the dividend was lifted 9.5% to 30p per share. At current prices, that gives the stock a yield of more than 7%.

Investors’ main concern is that Aviva has struggled to deliver consistent growth. New boss Maurice Tulloch aims to fix this. He should be well positioned to do so. His previous roles include heading up the group’s UK business and, most recently, its international operations.

Tulloch has already announced a management reshuffle as he begins to put his own stamp on the business. We should find out more about his plans when Aviva publishes its half-year results in August.

My view

Concerns about Aviva’s lack of growth are fair. But the dividend was covered comfortably by cash generation last year. In my view, this payout should be fairly safe.

Looking ahead, analysts have suggested some of the group’s international businesses would attract a higher valuation in a trade sale or spinoff. Deals of this kind could generate significant shareholder returns for UK investors.

Consensus forecasts for 2019 price the stock on 7 times earnings, with a 7.5% dividend yield. In my view, the risks are in the price. I believe the shares are undervalued and rate Aviva as a ‘buy’.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Aviva. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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