Lloyds (LSE: LLOY) shares have had a great run recently. Year to date, the Lloyds share price is up 33%. Over 12 months, the stock is up 51%.
I already own some Lloyds shares so I’m pleased that the share price is rising. Should I buy more though? Let’s examine the outlook for Lloyds shares from here.
Lloyds share price: I see further upside
The short-term set-up for Lloyds shares is quite attractive, in my view.
For starters, the UK economy looks set for strong growth this year. Last month, the Bank of England raised its forecast for British economic growth to 7.25% for 2021, up from February’s estimate of 5%. This growth should provide a nice backdrop for Lloyds – its fortunes are closely linked to the health of the UK economy.
Secondly, analysts are upgrading their earnings forecasts for the stock. Over the last three months, the consensus earnings per share estimate for 2021 has risen from around 4.1p to 5.9p. Analysts are also raising their price targets for Lloyds. Last week, both Barclays and JP Morgan lifted their targets. Barclays went from 55p to 60p while JP Morgan went from 54p to 59p. This kind of upgrade activity can boost a stock’s share price.
Third, the stock’s valuation is still very low. The current FY21 earnings forecast of 5.9p equates to a forward-looking price-to-earnings (P/E) ratio of just 8.2 at the current share price. By contrast, the median forward-looking P/E across the FTSE 100 is 16.7.
Finally, Lloyds has said that it intends to resume a “progressive and sustainable ordinary dividend policy” in the near future. Regular dividends could increase the appeal of owning the shares, and push its share price up further.
Putting this together, I see plenty of appeal in Lloyds shares right now.
Long-term uncertainty
I do still have concerns about the long-term investment case for Lloyds shares, however.
My biggest concern is that I think the banking industry is going to see a significant amount of disruption over the next decade due to advances in financial technology (FinTech). Today, FinTech companies such as PayPal, Square, Wise, Revolut, and SoFi are rapidly capturing market share. I suspect that in 10 years’ time, the banking industry will look very different. This adds uncertainty to the investment case.
My second concern is that UK interest rates could remain low for years. This could hinder Lloyds’ profitability and put a brake on the rising share price due to the fact that banks are able to generate larger profits when interest rates are higher. We may see UK interest rates rise as the economy continues to recover in the years ahead. However, I think it will be a long time before rates are back at pre-Global Financial Crisis levels of 5%+.
Should I buy Lloyds shares now?
Weighing everything up, I’m not going to buy more Lloyds shares for my portfolio for now. I will continue to hold the shares I have because I think the price has further to climb.
However, I will be investing new capital in other stocks that have more growth potential in the long run.
