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

Lloyds shares have surged over the past month on the back of strong earnings and an improving outlook. Dr James Fox takes a closer look.

| More on:
Young black colleagues high-fiving each other at work

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

2023202420252026
Earnings per share (p)7.65.97.38.6

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »