Since the middle of October, we have seen strong upwards movement in the shares of Lloyds (LSE: LLOY). The banking giant has increased in value by 30% over that period. Yet that leaves the Lloyds share price today more or less exactly where it stood a year ago.
So might they tail off around this point? Or could there still be more upwards movement to come?
Long-term outlook
I think the answer depends on how investors feel about what may happen in the next several years.
At face value, even after the recent Lloyds share price rally, the company looks like potentially good value. It trades on a price-to-earnings ratio of 9, which looks fairly cheap. It also has a dividend yield of over 4% which, while not outstanding, is decent, in my opinion. The bank has a strong brand and leading position in the UK mortgage business. That helps it make mammoth profits.
Why is it priced like this? After all, if Lloyds can keep churning out the earnings like it did last year, the shares arguably look undervalued. The key question is, can the bank indeed maintain its earnings level? I think the current price reflects investor nerves that a weak economy could push up defaults on loans, hurting profits at the bank.
Sideways drift
That has been the case for several years now, though Lloyds has looked cheap for a while – but its price is the same as it was a year ago. That is despite there being more clarity now about post-pandemic economic recovery than was the case 12 months ago.
Meanwhile, it has been up and down. But essentially, the current Lloyds share price suggests that investors see no more value in the company than they did a year ago.
Arguably they even see less, as during that period there has been a large buyback programme. That means the bank’s earnings per share should now be higher, even if total earnings are static – yet the share price has moved sideways on a one-year timeframe.
Possible rally drivers
I reckon investors are hanging back to see how the bank fares during the current period of economic underperformance. The first three quarters of last year saw profits fall 26% year-on-year.
So a lot of City eyes will be on the bank’s full-year results when they are released on Wednesday. I reckon if the bank demonstrates that credit defaults remain low and the outlook is improving, the Lloyds share price could continue rallying. A generous dividend increase could also have the same effect.
Ongoing uncertainty
However, if the outlook remains unsettling, that could be the end of the recent rally in Lloyds’ shares. Rival Barclays did little to boost confidence with its results earlier this week. It has far more international and investment banking exposure than domestically focussed Lloyds though.
So although I think the price rally could continue, it depends on the outlook for the UK economy and default rates. For now I remain unclear about whether the worst of the downturn is behind us, so will not be buying Lloyds for my portfolio.
