If I’d invested £1,000 in Lloyds shares 1 year ago, here’s what I’d have now

Despite surging 19.6% over the past month, Lloyds (LSE:LLOY) shares are only up 4.3% over the past 12 months. However, combined with the dividend yield — which would have been around 5.1% at the time of purchase — a £1k investment made a year ago wouldn’t have been bad at all. All in all, I’d have around £1,094.

But what about now? After that near-20% surge in a month, could it really go any higher? Let’s explore.

Valuations

Lloyds trades at 6.5 times earnings for the past 12 months. That’s not expensive and it’s much lower than the average for the FTSE 100. However, cyclical stocks, and notably UK-focused banks, tends to trade at a discount to the index average as the perception is they offer less exciting growth opportunities.

Lloyds’ growth forecast is relatively positive, but quite bumpy. It also reflects a likely drop in earnings this year related to a potential fine concerning activities in the motor finance sector. Accordingly, the forward earnings metrics are less attractive for 2024, before improving towards 2026.

I would also suggest that given Lloyds beat earnings expectations last year — albeit narrowly — these forecasts may be positively updated. This is my own take, but for the reasons noted below, I’m optimistic.

Tailwinds

Lloyds has, so far, surpassed expectations when it comes to bad debt and impairment charges stemming from economic distress caused by higher interest rates. One reason for this is the fact that the average Lloyds mortgage customer has an income of £75,000. In turn, this above-average income has provided some shelter from economic hardships.

Nonetheless, Lloyds and its peers will likely benefit as central bank interest rates fall towards the ‘Goldilocks Zone’. This is roughly between 2.5% and 3.5%. It’s a situation whereby interest income is elevated versus the past decade, but impairment risks fall as customers find it easier to repay their debts/mortgages.

It’s also worth adding that banks practice hedging. This can simply mean diversifying their loan and asset portfolio, so that some are variable and some are fixed. When interest rates fall, net interest income will remain elevated because millions of people will have their mortgages fixed around 5%, and the bond portfolio will also have a higher fixed yield.

The bottom line

Of course, there are risks. Lloyds is entirely focused on lending and has no investment arm. So it’s less diversified than its peers. Likewise, it’s entirely focused on the UK market. The UK is a low-growing economy, but some estimates say it’s Europe’s fastest growing over the long run. As a cyclical investment, investors should be wary of the country’s economic challenges including widespread labour inactivity, low productivity, and poor health.

Nonetheless, Lloyds still looks like a strong investment opportunity. It’s trading at low multiples and has some catalysts for business growth. And despite my concerns about the UK economy, I’m a perennial optimist things will improve.