3 reasons why I think the Lloyds share price could smash the FTSE 100 in 2021

The FTSE 100 suffered a poor 2020, but the Lloyds share price was absolutely trashed. It could be a different story in 2021, says G A Chester.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Lloyds (LSE: LLOY) share price was one of the hardest hit among FTSE 100 blue-chips in 2020. Banks are highly geared to the health of the wider economy, so the awful performance of Lloyds’ shares wasn’t a great surprise. After all, the UK suffered its worst economic contraction in centuries last year.

Is there cause for greater optimism this year? I reckon so. Indeed, I can see three reasons why the Lloyds share price could smash the FTSE 100 in 2021. First, let me briefly put the stock’s performance last year in the context of the index.

Lloyds share price versus the FTSE 100

Lloyds’ shares ended 2020 at 36.44p. This was a whopping 41.7% below the 62.5p level at which they started the year.

The FTSE 100 also suffered an annus horribilis, but nowhere near as bad as Lloyds. Having started 2020 at 7,542.40 points, it closed on New Year’s Eve 14.3% lower at 6,460.52 points.

Lloyds could lead the FTSE 100 higher

The short-term outlook for the Lloyds share price is doubtful, simply because the short-term outlook for the economy isn’t great. Indeed, in an interview with the BBC’s Andrew Marr yesterday, Boris Johnson said Covid restrictions are “probably about to get tougher.” This is due to the fast-spreading new variant of the virus.

However, an initial study of the variant suggests it’s neither vaccine-resistant nor causes more severe disease. If so, as mass vaccination is rolled out, we can expect economic activity and business confidence to rise through 2021.

Just as stocks in the sectors most highly geared to the UK economy — like Lloyds — were hardest hit last year, so they could lead the FTSE 100 higher as economic activity begins to recover this year.

Dividends back on the agenda

It wasn’t only the performance of the Lloyds share price in 2020 that hurt investors. Dividends were suspended at the request of the Prudential Regulation Authority (PRA). The PRA warned it was “ready to consider use of our supervisory powers should your group not agree to take such action.”

There’s better news for 2021. The PRA announced last month that it’s permitting banks to “recommence some distributions should their boards choose to do so.” Dividends were a big attraction for Lloyds investors before the pandemic. A resumption of payouts should lead to rising demand for the stock among income seekers.

Lloyds share price versus net asset value

In the wake of Lloyds’ post-financial-crisis resumption of dividends, its share price reached a high of 89p in May 2015. This was 1.6 times the bank’s tangible net asset value (TNAV) per share of 55.8p.

Lloyds current share price of 36.44p is a mere 0.7 times its last reported TNAV of  52.2p. I don’t see the shares re-rating to 1.6 times TNAV in the near term. But it shows the potential for a large rise, as an economic recovery gains traction.

What am I waiting for?

For the three reasons discussed, I think it’s possible the Lloyds share price could smash the FTSE 100 in 2021. Nevertheless, the stock remains on my watchlist for the moment.

With a new chairman just installed, and a new CEO on the way, I’m keen to see if the dividend is reinstated in the full-year results on 24 February, at what level, and the policy on future payments. I’m also keen to see the new management team’s strategy for taking the bank forward in the medium term.

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.

G A Chester has no position in any of the shares mentioned. 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.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »