Why Lloyds’ share price could double

If this thing happens, the Lloyds share price could rocket 100%…

| More on:
Hand arranging wood block stacking as step stair on paper pink background

Image source: Getty Images

Intuitively, you’d think the giant companies of the FTSE 100 would have relatively high share prices. And for the most part that’s true. You’ll even have to pay over £100-a-pop for a couple of companies (AstraZeneca and Spirax-Sarco Engineering).
However, there are a few blue-chip names that can be bought for less than a quid. Rolls-Royce has traded above and below that level in recent weeks. But Lloyds and ITV are currently firmly ensconced in sub-£1 territory.
I’ll leave ITV for a future column, and focus today on Lloyds. Priced at 45p as I’m writing, I reckon its shares have considerable upside potential. Indeed, I think there’s a good argument the price could double.

Harking back to the financial crisis

Lloyds has been a stalwart of the FTSE 100 ever since the index was established in 1984. The reason it’s a ‘penny stock‘ today goes back to the shedloads of new shares it had to issue as a result of the great financial crisis and recession of 2008-09.

It went into that period with less than 6bn shares in issue and came out of it with more than 60bn.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Sleight of hand

If you’re wondering why NatWest — the former Royal Bank of Scotland and biggest UK bank pariah of the financial crisis — isn’t also a penny stock, the answer’s simple. As well as the name change, it has performed a sleight of hand called a share consolidation.
Shareholders were given one share to replace every 10 they owned and the price went from 20p to 200p in the blink of an eye — a price “more appropriate for a company of the group’s size in the UK market,” as the board put it.

A more valuable business today

Lloyds, I think to its credit, hasn’t veiled the past with a share consolidation and name change.
At the time of its 2007 results, its share price was 430p and its market capitalisation was around £25bn. The share price may now be about a tenth of that level, but the huge increase in the number of shares means its market capitalisation is actually higher at £31bn.
In other words, the market sees Lloyds as a more valuable business today. The same can’t be said of NatWest, despite its more ‘respectable’ share price.

Return on equity

In the aforementioned 2007 results, Lloyds made a 25% return on equity (ROE). However, those days are long gone. For banks — as the financial crisis exposed — a 25% ROE is only achievable with dangerously high financial leverage.
Lloyds’ target ROE for 2022 is less than half that of 2007. However, this level of return still represents substantial profits and decent dividends. And, of course, at lower risk — the aim of the post-financial-crisis banking reforms.
Lloyds is forecast to make a profit of £4.5bn this year and to pay shareholders ordinary dividends totalling £1.6bn. Analysts also reckon it’ll have a further £1.6bn of surplus cash, and most expect this to be used for share buybacks.

Value indicators

At 45p a share, Lloyds is priced at a modest 7.5 times forecast 2022 earnings with a prospective dividend yield of 5.2%.
A price-to-tangible net asset value (P/TNAV) ratio of 0.78 is a further indicator of potential good value. It means investors are currently paying just 78p for every £1 of Lloyds’ assets.

Why the share price could double

For a spell before the succession of negatives of recent years — Brexit nervousness, the Covid pandemic (and snap-recession), and current fears of a cost-of-living crisis — the market valued Lloyds at a P/TNAV in the region of 1.5.
I have little doubt it will do so again at some point in the future. A time will come when the economic outlook (or market perception of it) and investor sentiment are brighter.
Based on Lloyds’ current TNAV, the share price would double if the market again valued the business at a P/TNAV of around 1.5. And, as I say, I think it will do so at some point.
However, I’m equally certain Lloyds will face another recession or crisis in due course. That could come sooner or it could come later.

Final thoughts

I think Lloyds offers good value when it’s at a P/TNAV of below 1. But I’d have to be prepared for some volatility. Because the bank’s highly synched to the UK economy, there are inevitably ups and downs in its valuation through the economic cycle. Buying when the P/TNAV is low could give me some degree of insulation.

Should you invest £1,000 in Lloyds right now?

Before you consider Lloyds, you’ll want to hear this.

Motley Fool UK's Director of Investing Mark Rogers has just revealed what he believes could be the 6 best shares for investors to buy right now… and Lloyds wasn’t one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 shares that are currently better buys.

All you need is an email address to get started

Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended Lloyds Banking Group and ITV. 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

New virtual money concept, Gold Bitcoins
Investing Articles

After the latest ARB share price slide, is it finally time to buy?

The ARB share price has fallen in the face of crypto weakness, but not as far as I'd feared. I…

Read more »

Early morning sunlight filtering through the green foliage of an tranquil forest clearing
Investing Articles

Will Woodbois ever pay a dividend?

Could the prospect of eventual Woodbois dividends make our writer consider the shares for his portfolio? Not yet -- here's…

Read more »

Electric cars charging at a charging station
Investing Articles

As both stocks fall, here’s why I’m buying NIO shares and not Tesla!

NIO shares fell yesterday, but so did stocks in EV market leader Tesla. But here's why I'm backing the Chinese…

Read more »

Renewable energies concept collage
Investing Articles

What’s going on with the SSE share price?

Jon Smith goes through SSE's full-year results and talk of a windfall tax to see how the news is impacting…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

My top growth stocks to buy before June!

Growth stocks, generally, have performed very poorly this year. But amid continued volatility, these are my top picks to help…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Is the Amigo share price back from the dead?

The Amigo share price is up by double-digits this week after the firm made an exciting announcement. Zaven Boyrazian investigates.

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

After plunging 40%, is Snap stock a no-brainer buy? 

Snap stock fell around 40% yesterday, due to an update saying it would miss Q2 revenue and profit expectations. Is…

Read more »

Investing Articles

Why growth stocks will continue to fall

With central banks around the world fretting over inflation, and the UK likely to enter a recession, I think growth…

Read more »