A doubling in the Lloyds Banking Group (LSE: LLOY) share price in the next year seems a bit far-fetched, I admit.
Even if it doesn’t happen, I’d say the bank still looks like a top long-term buy just for its 6% dividend yield.
If the share price and dividend stay the same for ever, I’ll be happy to buy more Lloyds shares every year. And I’d use the dividends to buy even more shares.
It all changes
Things won’t stay the same, of course. For one thing, forecasts show dividend growth in the next two years. If they’re right, the yield could be close to 8% by 2026.
They put the 2026 price-to-earnings (P/E) ratio at 5.5. But what’s a fair P/E bank valuation? That’s a tough question.
In times like this, I’d say they should be valued lower. But that 5.5 isn’t much more than a third of the FTSE 100‘s long-term average. It must be too low, mustn’t it?
Even if the Lloyds share price did double, that 2026 P/E would still be a fair bit below the Footsie average at 11. And we’d still have a 4% dividend yield. Not so long ago, that would have seemed about right.
Interest rate hit
Even with that, I do think interest rates are likely to keep Lloyds shares down for a while yet. Hopes for an early cut in 2024 look to have been dashed. I mean, Bank of England (BoE) Governor Andrew Bailey seems reluctant to even talk about it. And there’s a feeling that rates could stay above 4% for a couple of years yet.
Lloyds, as the UK’s biggest mortgage lender, faces more bad debt risk than its high street rivals. Still, in the bank’s FY 2023 statement on 22 February, it posted only a modest impairment charge.
And cash flow at Lloyds seems to be just fine right now too. With the results, the bank also said: “Given the group’s strong capital position, the board has also announced its intention to implement an ordinary share buyback programme of up to £2.0 billion.”
Buyback effect
This means future earnings and dividend cash will be spread across fewer shares. And bigger per-share valuation measures should push the share price up, I’d hope.
Well, despite a series of strong capital returns, not much has happened yet.
The Lloyds share price has been pretty much flat for three years, and it’s still down 25% in five years. But more buybacks could help boost any possible doubling for the stock.
Can the shares double?
So what’s my feeling about Lloyds shares doubling now?
I doubt we could see it in the next 12 months. I think our current economic state could keep people away from bank stocks for a while yet.
But I do think a combination of earnings and dividend growth, coupled with a revaluation, could send the shares strongly in the right direction in the next few years.
