Has the Lloyds share price peaked?

After increasing 41% in a year, has the Lloyds share price started to run out of steam? Our writer investigates — and explains his next move.

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It has been a good year for Lloyds (LSE: LLOY) shareholders. The Lloyds share price has added 41% over the past 12 months. But after a strong start to 2022, the bank’s shares have stalled recently.

Is this just a temporary setback I can use as a buying opportunity for my portfolio? Or might the Lloyds share price be headed for a lasting pullback?

Positive drivers for the share price

First, it is worth considering what has been behind the shares’ impressive performance over the past year. Investors have warmed to the strong recovery in business performance seen at Lloyds last year. After 2020 had been hit by an uncertain trading outlook and the potential for sizeable loan defaults, 2021 offered something much closer to business as usual.

In fact, last year’s performance underlined just how attractive a business Lloyds can be when it has the wind in its sails. At the end of the third quarter, it reported a mammoth loans and advances book of £450bn. It is the biggest mortgage lender in the country and that scale translates into large profits – post-tax earnings came in at £5.4bn for the nine months in question. The company also took the opportunity to improve its outlook for the full-year. The final results are scheduled for this month.

Last year the company also reinstated its dividend, which it had been forced by the regulator to suspend during the pandemic. I think that dividend restoration helped support the share price. Positive news either on business performance or the dividend in this month’s final results could help boost the share price further, in my opinion.

Some risks with Lloyds

However, after the surge we have seen in the share price, high expectations are already being factored in by investors. If the company’s results this month and its 2022 outlook meet or surpass those expectations, I think there could be further upside potential from here. But I see risks too.

After all, why has Lloyds with its £37bn market capitalisation doggedly remained a penny share since the last financial crisis? The most likely explanation in my view is that many investors remain wary of the viability of the company’s business model during a severe economic downturn. The heavy reliance on property lending, focused in the UK, means that if a recession causes mortgage defaults to soar, Lloyds could see its profits collapse.

Right now the UK property market seems resilient. That could help support the Lloyds share price. Indeed, as long as the property market remains robust, I reckon the price could keep going higher. So I do not think it has necessarily peaked. But given the cyclical nature of the economy, sooner or later house prices will cool. I expect that to hurt the the share price, although it may still be some years in the future.

My next move

As a Lloyds shareholder, I will be interested to see what the company unveils in its final results this month. A meaty dividend increase would not only be good news in itself, I think it could also boost the Lloyds share price.

I see further possible upside in the shares and would consider adding to my holding this month before the results.

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.

Christopher Ruane owns shares in Lloyds Banking Group. 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.

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