Lloyds (LSE: LLOY) shares pay out big dividends at the moment.
The FTSE 100 bank is paying out more than it has for over a decade, and with a good (for the bank) interest rate environment and the shares looking underpriced, I’m curious how much I could earn from Lloyds over the next few years.
I’ll use an example £1,000 stake. How much could I earn from that up to 2025?
Let’s start with those dividends. I’ll use forecasts for the next three years to see what Lloyds might pay me. These analyst predictions aren’t always perfect, but they’re a good guide.
| 2023 | 2024 | 2025 | Final | |
| Amount | £1,000 | £1,065 | £1,141 | £1,233 |
| Dividend forecast | 6.47% | 7.12% | 8.10% | |
| Dividend return | £65 | £76 | £92 |
Not too bad! My £1,000 stake is growing nicely and that rising dividend is giving my investment a decent return. I’d be pretty happy if that was the end of it, but I have a couple of reasons to think I would see even more cash returns from these shares.
First, Lloyds isn’t just spending its earnings on dividends. It’s also put a sizeable amount of cash into share buybacks.
£2bn to spend
With a buyback, the bank will purchase its own shares to reduce the amount of them in circulation. Fewer shares in issue means each one accounts for a little bit more of the company. So I’d expect the price to rise to make up for that.
The bank is carrying out a £2bn programme, which would buy back about 7% of all shares. Will that equal a 7% increase in the share price? Well, it’s not usually so simple. The buyback is already in progress and the shares are still the same price, although I do expect an uplift at some point.
Speaking of the share price, it seems strange how cheap Lloyds stock still is. The current price is 43p. That’s cheaper than it was in 2009 when the bank was reeling from the financial crisis and it’s not the only metric where it looks underpriced.
Lloyds trades at under six times forward earnings right now. That’s really cheap. The bank is making a lot of profit compared to the price of its shares and I’d expect to see some growth here because of it.
But I will say that other UK banks have similar valuations. This perhaps shows a lack of confidence in the sector. And in fact, this is probably the biggest risk for Lloyds, over the next three years or over the next 30.
Unloved sector
Banks in this country have been unloved since 2008 and the situation doesn’t seem to be improving quickly. Earlier this year, banks like SVB, First Republic and Credit Suisse all collapsed. None of them were strongly tied to the UK, but the crisis still had reverberations here.
Despite this, I do expect to see the shares rise over the next three years. For a £1,000 stake, I would say an increase to £1,400 seems reasonable, although it’s certainly not guaranteed. That includes those dividends, by the way.
Per year, this would be about 11.9%. That’s pretty nice. I do own Lloyds shares already, so let’s hope I’m somewhere near the mark here.
