This year has been good to shareholders of Lloyds Banking Group (LSE: LLOY). With the economy bouncing back strongly from 2020’s lows, it has seen its loan losses plummet and earnings rebound. Hence, the Lloyds share price has surged from its January low. But what might 2022 hold for the UK’s largest lender?
The fall and rise of the Lloyds share price
Before Covid-19 crashed global markets, the Lloyds share price was doing fine. On 16 December 2019, it hit its 2019 closing high of 67.25p, before ending the year at 62.5p. Then along came coronavirus to spoil the fun. During the London market meltdown of spring 2020, Lloyds closed at 27.73p on 3 April. But the worst was yet to come, with the shares bottoming out at 23.58p on 22 September 2020. At the time, I thought this was crazy, so I said so.
Lloyds stock duly rebounded, closing out 2020 at 36.44p. It then lost ground, hitting its 2021 closing low of 33p on 29 January 2021. But it’s been largely uphill since then, with LLOY hitting its 2021 intra-day high a month ago, peaking at 51.58p on 2 November. On Thursday, the shares closed at 46.96p, down 4.62p (-9%) from this recent high.
I see Lloyds as a binary bet on the UK for 2022
As we’ve seen since last Friday, worries about new virus variants can still send stocks steeply southwards. Hence, if we fail to conquer Covid-19, then I suspect that the Lloyds share price next year will be driven by FUD (fear, uncertainty and doubt). However, if it appears that we’re winning the war on coronavirus, then optimism, hope and even euphoria could drive this stock steeply higher. That’s why I see Lloyds as a binary bet on UK economic recovery next year, where two extremes might emerge.
Scenario 1: Hurrah!
In this Pollyanna plot, everything is golden. As 2022 wears on, coronavirus takes a beating and the global economy rebounds strongly. As a result, consumer spending soars, asset prices keep rising, and company earnings surge. In other words, it’ll be like the Roaring Twenties, when the world bounced back from the 1918 flu pandemic. In this outcome, I could see Lloyds’ earnings and dividends rise steeply, dragging up its share price with them. In this best of all possible worlds, I could see the Lloyds share price hitting 60p to 65p next year.
Scenario 2: Doom and gloom!
In this ultra-pessimistic scenario, Covid-19 runs rampart in 2022, leading to more social restrictions and lockdowns. Consumer spending plummets, international trade nosedives, company earnings collapse, and asset prices take a beating. In this setting, Lloyds’ lending losses explode, its earnings per share plummet, and the bank cancels its dividend to preserve cash. In this horrible outcome (comparable to spring 2020), I could see the Lloyds share price crashing back to, say, 25p to 30p.
I’d buy at the current Lloyds share price
Of course, we could also see something between the two. Regardless, I don’t own Lloyds shares today, but they look attractive to me on fundamentals. The stock trades on a lowly rating of 7.2 times earnings and an earning yield of 14%. The dividend yield of 2.6% a year is lower than the FTSE 100‘s 4.1% yield, but has room to rise. These numbers appeal to me as a veteran value investor. Hence, as an optimist, I’d buy Lloyds at current prices and hope for the best!
