Lloyds (LSE: LLOY) shares have been a basket case for years, some might say. The share price is 43p as I write and hasn’t been above the £1 mark since the banking crisis in 2008.
But now, an eye-catching dividend forecast and a host of other signals indicate the stock might now be seriously undervalued. The shares could even reach £1.50 by the end of 2024.
If Lloyds shares pass that mark, shareholders would enjoy a 249% gain on the current share price – while collecting dividends along the way too.
Best FTSE 100 buy?
A tripling share price might sound fanciful as of now, but we saw a similar story play out in 2023. Rolls-Royce, another unloved FTSE 100 giant, rose from 70p up to 269p in little over a year.
Many called the engine maker underpriced then. I’d know, as I bought in while the shares were cheap, although I’ll confess that I didn’t quite catch the bottom.
If Lloyds treads the same path then this might be the best Footsie buy going. And looking purely at the numbers, there’s plenty to like here.
The good news starts with recent earnings. The black horse bank has been cashing in thanks to a rise in interest rates, which tend to help lenders increase margins.
With bigger cash flows, come bigger dividends. A dividend yield of 6.2% looks enticing indeed and is bettered by the forecast of 7.1% for 2024 and 8.0% for 2025. Those big returns, well above Footsie averages, might tempt investors if the wider economy stalls.
Inexpensive shares
Those big earnings haven’t been matched with an increase in share price either – the shares began the year a couple of pence higher at 47p – which is why Lloyds is still trading at cheap ratios.
The price-to-earnings ratio of the bank is 5.5 – some distance cheaper than the US banking average of 8 and the global banking average of 9.
At an inexpensive share price, removing shares in issue is often a good use of capital, and that’s exactly what Lloyds is doing.
A £750m share buyback is underway, taking around 7% of shares out of circulation. In theory, this should drive the value of the remaining shares up. Little has happened so far, it’s true, but perhaps we’ll see the effects of this in 2024 instead.
More good than bad
With all this good news, it’s important to look at the bad too, and one concern sticks out to me most with Lloyds – high interest rates mean higher impairments. The £187m of bad loans the bank booked for Q3 could be a sign of things to come.
Still, I’m bullish on the whole here. I own a position already and hope 2024 will kick a little life into my Lloyds shares.
