Are Lloyds Banking Group (LSE: LLOY) shares the best buy on the FTSE 100 right now? I think they might be, and I reckon there’s a chance they could double my money.
Now, I’ve had the same idea a number of times. When we’ve emerged from one crisis or another, I’ve thought… Lloyds must be on the up now.
And, well, you know what’s happened. A quick look at the Lloyds share price chart shows I haven’t exactly been right. So far.
Different this time?
Why do I think I might be right this time? Let’s look at a few numbers and see where they lead.
It’s mostly about fundamental valuation measures. And for the big FTSE 100 banks, I reckon the price-to-earnings (P/E) ratio is a key long-term one. It relates a share price to the earnings a company can deliver, and lower is better. A low P/E means we can buy more earnings for less money.
Lloyds is on a forecast P/E of about six. And that would drop to five by 2025, if the analysts have it right.
What’s a fair value? Well, the FTSE 100 has a long-term average of about three times that. So even if Lloyds shares doubled, they’d still look cheap compared to the index.
All about cash
Banks are all about money, and we buy them for a share of the cash, right? It comes to us in the form of dividends, and Lloyds offers a forecast dividend yield of 6% now. So for every £100 we put into Lloyds shares, we should get back £6 in annual dividends.
Again, this is a measure that analysts think will improve. By 2025, they expect an 8% yield.
So even if the Lloyds share price should double by then, the dividend would still yield a very respectable 4%. And that seems about right by long-term bank standards.
Any support?
These two measures suggest to me that Lloyds shares could be fair value at twice the current price. But is there any support for these predictions?
It’s down to forecasts again, but the financial sector might just be set to shine. The consensus suggests that pre-tax profit from FTSE 100 companies could grow by more than £50bn in 2023. And the financial sector should account for more than half of it.
On top of that, banks are expected to pay out more in dividend cash than in 2007, the year before the great banking crisis.
What could go wrong?
The biggest risk of all this not happening, I think, is that it relies on forecasts. And stock market analysts have got it badly wrong plenty of times in the past.
If the world’s economies struggle for much longer, this might all mean nothing. On that score, fears for China’s growth could lead to a big downer.
And then, of course, there’s the risk of listening to me. After all, I’ve been wrong about Lloyds so many times before. But I do intend to buy more Lloyds shares.
