It must be said. The Lloyds (LSE: LLOY) share price doesn’t make a lot of sense.
It just keeps falling. It’s now 42p. It’s down by 22% this February, and 36% since before the pandemic. This isn’t what I expect from a stock offering its best dividend in years.
The firm is even buying back its own shares to the tune of £2bn. The idea of a buyback is to drive the value of the shares up. And yet, the share price keeps going down.
In fact, the shares traded for a higher price in 2009.
On the surface, this looks like a rare opportunity to buy in here, one we might not see for another decade.
I’m not the only one with this opinion, mind. Even for the experts, the Lloyds share price is something of a puzzle. Analysts have an average price target of 66p, which tells me they think the price is too low as well.
That’s a big upside from 42p, and it stands out to me as analysts are often cautious. They rarely make bold claims in case it makes them look foolish. Rather, they tend to go the way the wind blows. And they still think the Lloyds share price is too cheap.
Three concerns
JP Morgan was one analyst that disagreed. It has the 42p share price as fair value. Its report is a good starting point to look at the risks here as it’s spotted a couple of problems lurking below the surface.
Its first concern is interest rates. Now, high interest rates are good for banks. They can improve revenues if they take a slice from the amount they offer customers. But if rates get too high, then those customers start to default. And that might be where we’re heading.
It’s hard to find any mortgage holder who isn’t worried about interest rates right now, and a rise to 5.75% or 6% is on the cards too. This could be a crisis in a year or two. That will affect all banks, but it’ll affect Lloyds more than most because it’s the nation’s largest mortgage lender.
A second issue is the UK economy. JP Morgan expects a “hard landing”, which is analyst code for a recession. If one does come, people will lose jobs and default on loans and mortgages. That would hurt earnings and is another crisis in the making.
A third concern is with profits. Banks are making, well, bank right now. These increased earnings are great for investors until it becomes a political issue. The public don’t like to see record profits while they’re struggling to pay their mortgages, and politicians will take note of that.
We have an election next year. Will candidates try to win votes by attacking the banks? It’s possible. A windfall tax has already been talked about. There could be regulatory risk on pricing and forbearance too.
Not a bargain
Together, these risks help me make sense of the Lloyds share price. It’s not the complete bargain that it seems at first glance.
That said, I think there’s value here. I own Lloyds already, but I do think the share price looks attractive. It surely can’t stay at 42p for much longer. I’m happy to continue holding, and I may add to my position soon.
