Since the Lloyds share price crashed last year, I have constantly adopted a bullish stance on the stock. Indeed, I first stated that I would be happy to buy the Lloyds share price in July last year when it was only priced at 30p. It has now reached 50p, up nearly 40% over the past year. But is there still upside potential or have the shares reached their peak?
Again and again, Lloyds has delivered resilient trading updates throughout the pandemic. This was no different in its recent Q3 trading update. Indeed, net income rose 20% year-on-year to over £4bn. Underlying profit was also able to rise 88% year-on-year to over £2.1bn, in part due to the £301m impairment charge last year.
The full-year performance has also been extremely positive so far. Indeed, in comparison to last year, the bank has not faced any impairment charges, and this means that its statutory profit after tax has reached nearly £6bn for the the nine months to the end of September. Partially due to a £4.1bn impairment charge, statutory profit after tax was only £434m in the same period last year.
This is one of the main reasons why the Lloyds share price has managed to rise so significantly and is a clear indication that it has recovered well from the pandemic. These results have also been achieved in a low-interest rate environment, a factor which can hurt profitability. As such, they are very impressive indeed.
Such strong results have also led to the return of shareholder returns. Indeed, this year, total dividend payments totalled 1.24p per share, equivalent to a yield of 2.5%. While this is not very big in comparison to other FTSE 100 stocks, there is significant scope for this to rise, especially considering this year’s excellent results. The prospect of a large share buyback programme also seems likely. Both these factors could help see the Lloyds share price soar.
Furthermore, due to rising inflation, it is likely that interest rates will rise soon. While this may cause negative effects on the stock market in general, Lloyds is likely to benefit in the long term. This is because lending becomes more profitable, and this is clearly a major positive.
Nonetheless, there are also some risks with the Lloyds share price. For example, its recent excellent results have been aided by a very active housing market, in which house prices have reached all-time highs. This has led to very large mortgage lending volumes, a factor hugely beneficial for Lloyds. Nonetheless, there is the risk that housing prices may crash at some point, and lower interest rates may be a catalyst for such a crash. As such, while a higher interest-rate environment should be beneficial for Lloyds, there may be some indirect consequences.
What’s next for the Lloyds share price?
Despite these risks, I believe that the Lloyds share price still has upside potential. Based on this year’s earnings, it has a price-to-earnings ratio of around five. This implies an incredibly cheap valuation, even if profits decrease slightly next year. As such, I’m willing to put the risks to one side and may buy Lloyds shares for my portfolio.
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Stuart Blair 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.