The Lloyds Banking Group (LSE: LLOY) share price shows something that’s frustrated investors forever.
We see a stock that we’re convinced is undervalued. So we buy, hold, maybe buy some more… and it stays stubbornly undervalued.
That can go on for a long time, as the stock market is more driven by sentiment in the short term. Or, of course, we might just be wrong.
Outing the value
But if we’re right, then surely something will come along to out the hidden value in our stocks and make the world see them as attractive as we think? Won’t it?
There’s a few things I think could do that for the Lloyds valuation. And one of them is the price itself.
What do I mean by that? Well, momentum can drive a share price more than anything. And it can go on for quite some time. Nobody wants to break the trend ahead of the market.
But since the middle of February, Lloyds shares have been on the up. So might hesitant investors take the hint now? It’s way too early to tell if this really is the start of a new bull run. But it can’t hurt.
Buybacks
I reckon share buybacks should give a stock a boost too. A buyback reduces the number of shares in existence, and each share left gets a bit more in earnings and dividends. So the share price should rise proportionally.
With FY results in February, Lloyds announced a new £2bn buyback. That’s close to 7% of the market-cap at the time. And it should mean a 7% share price rise by the time it’s complete, in theory. Oh, it’s up 12% since then.
Analysts expect around another £3.6bn in buybacks over the next two years. Could that mean another 11% share price rise? It could take us to 57p.
Risk reduction
My final thought is that people see banks as really risky right now. In our inflation and interest rate mess, I’m not surprised. And property market pain isn’t so great for a big mortgage lender like Lloyds.
But what about when interest rates are down, the economy gets back to growth, risk falls, and we all stop being so glum? Lower interest rates alone could make shares more attractive in general.
A 60p, Lloyds share price would still mean a forecast price to earnings (P/E) ratio of only seven, based on 2026 forecasts. And that’s still only about half the FTSE 100 long-term average.
Speculative
This is all a bit speculative. And I do fear that financial uncertainty could keep Lloyds shares down for a while yet. For one thing, lower interest rates would mean lower lending margins. And the full effects of inflation could take a year or more yet to work through.
Still, I’ve just thought of something else that could boost the Lloyds share price… my hopes and dreams. Oh, hang on, no. I dream of buying more cheap shares, so I hope they stay cheap.
