Here’s what I think investors are missing about the Lloyds share price

This Fool explains why he thinks investors are overlooking the best qualities of the Lloyds share price and concentrating on the negatives.

| 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.

Bus waiting in front of the London Stock Exchange on a sunny day.

Image source: Getty Images

I have been covering the Lloyds (LSE: LLOY) share price now for over a decade. During this time, the bank has been transformed but has also had to deal with some significant headwinds. The low-interest-rate environment, PPI compensation, and the coronavirus pandemic have all had an impact on the group. 

Nevertheless, notwithstanding these challenges, the banking company is stronger today than it has been for a long time. The group has emerged from the pandemic in a stronger position than when it went in. Despite booking substantial loan losses, these charges have been nowhere near as bad as expected.

In addition, the booming demand for mortgages has produced windfall profits for the company. On top of these factors, regulators’ restrictions on dividends meant that Lloyds could not pay out its profits to investors and, as a result, its balance sheet is now stuffed with cash

Lloyds share price potential 

This is what I think the market is missing about Lloyds. Rather than focusing on its potential to return cash to investors, the market seems to be focusing too much on the risks the group is facing.

As one of the largest lenders in the UK, Lloyds is a bellwether for the country’s economy. I think it is fair to say that right now, the economy is facing some significant challenges, and these could have an impact on Lloyds. 

However, as I have tried to explain above, the banking group has seen several crises over the past decade, and it has managed to navigate every one. Of course, investors should never use past performance to guide future potential. There is no guarantee the organisation will be able to navigate the next crisis. Still, I think the lender’s prospects are far brighter today than they were a decade ago

And as the group recovers from the pandemic, I think it can become a dividend champion. 

Income stock 

Historically, Lloyds has paid around 50% of its earnings to investors via dividends. It has also returned cash with share buybacks, although I will not include these cash returns in my calculations for the sake of simplicity. 

According to City projections, Lloyds’ earnings per share could rise to 8.2p by 2022. A payout ratio of 50% suggests a potential dividend of 4.1p, based on these projections, or a dividend yield of 8.2% on the current share price. 

This is just a back-of-the-envelope-style calculation. There is no guarantee the shares will ever offer this level of income. Nevertheless, I think it highlights what the market is missing about the business. It has tremendous potential as a dividend stock, and that is why I like the shares. 

Therefore, I would buy shares in Lloyds as a dividend investment for my portfolio today, as the company recovers from the pandemic and looks to the future. 

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 considered so you should consider taking independent financial advice.

Rupert Hargreaves 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

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

How I’m aiming to become a Stocks and Shares ISA millionaire!

The Stocks and Shares ISA is an excellent vehicle for investments. In fact, many investors have become ISA millionaires. Here's…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

The Scottish Mortgage share price is on the up! Here’s why I’d buy

After a poor first half of the year, the Scottish Mortgage share price is beginning to rise. Here, this Fool…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Should I be grabbing cheap Lloyds shares?

Lloyds shares have underperformed in recent years. Here, this Fool explains why he's still considering the stock for his portfolio.

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

How I’m using UK dividend shares to try and turn £20,000 into £100,000

Our writer has ambitious investment goals -- and patience. Here he explains how he's buying UK dividend shares to try…

Read more »

Middle-aged lady in wheelchair writing on whiteboard
Investing Articles

I’m taking a defensive stance by investing in the FTSE ahead of the recession

The FTSE has outperformed several indices in 2022, including the S&P 500. Jacob Ambrose Willson believes it can be used…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Should I buy BP shares today?

BP is generating huge profits right now. Here, Edward Sheldon looks at whether he should buy shares in the oil…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Should I buy Rolls-Royce shares after the latest results?

Jon Smith runs over the key points from half-year results for Rolls-Royce shares to see if any green shoots are…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

A FTSE 100 stock that I never intend to sell

Hunting for undervalued stocks, Andrew Mackie explains why he recently bought more of this FTSE 100 powerhouse.

Read more »