Here’s what dividend forecasts could do for the Lloyds share price in the next three years

The Lloyds Bank share price is picking up, but banking still look like the sick sector of the stock market, even with rising dividends.

| More on:
Young mixed-race woman jumping for joy in a park with confetti falling around her

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.

What might help the Lloyds Banking Group (LSE: LLOY) share price gain some ground in the next few years?

I think it’s mostly sentiment. And it seems sentiment has been firmly against the banks in recent years. But I’m seeing signs that it could be changing.

For one thing, Lloyds shares, along with the other FTSE 100 high street banks, have been ticking up a bit.

Dividend forecasts

Before I think more about market sentiment, let’s take a look at how the Lloyds valuation is looking based on current broker forecasts.

The following table shows forecasts for this year and the next two, looking at how the price-to-earnings (P/E) ratio and dividend yield (DY) might go. And we’ll see how the dividends would be covered by forecast earnings

Year202420252026
Forecast P/E9.27.46.2
Forecast DY5.3%6.0%6.6%
Cover1.9x2.2x2.4x
(sources: Yahoo!, MarketScreener)

Now, I have to say, whenever I see a stock with a P/E of only around six and a dividend yield of 6.6%, I wonder what’s wrong.

But that’s what Lloyds looks like for 2026, after three years of forecast earnings and dividend rises. And when I see potential cover by earnings of 2.4 times, it makes be think the fault is with the market and not the stock.

Sentiment

But, sentiment is a fickle thing. I’ve been watching for ages for the FTSE 100 to break through the 8,000 point barrier.

Not that the particular number means anything specific. But financial headline writers to seem to love such things, and they can really drive optimism.

Though the Footsie is struggling to get to and stay above 8,000, I’m generally seeing more of that optimism right now. Some of it will be due to the start of a new financial year, and a whole new Stocks and Shares ISA allowance.

But falling inflation and interest rate hopes seem to be cheering people up too. Oh, and it’s sunny(ish).

Risk ahead

Saying that, we’re not out of the woods yet. In fact, disappointing US figures have just put a bit of a dent in the European interest rate outlook.

Lloyds is especially at risk if rates stay higher for longer. It’s the UK’s biggest mortgage lender. And if the Bank of England should feel the need to keep the squeeze going, the market might not see the share as such good value as I do.

What cheer there is seems to be firmly behind recovery and growth stocks now, like Rolls-Royce Holdings. A four-bagger in two years? We Lloyds shareholders can only dream.

Dividends

Still, I do think sentiment can eventually get back behind the banks and send Lloyds shares climbing again. And I reckon it’s those dividend forecasts that could make the difference.

We might need to see another set of, at least, interim results to get a feel for how the 2024 cash situation is going.

But a 6.6% dividend yield by 2026, more than twice covered by earnings? That’s a lot more attractive to me than the 1.6% marked in for Rolls-Royce for the same year.

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.

Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Rolls-Royce 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

Elevated view over city of London skyline
Investing Articles

I’m considering shares in this FTSE 250 investment trust while it’s trading at a discount

With this FTSE 250 investment trust trading at a discount to NAV, this Fool thinks it's a bargain. Not to…

Read more »

Investing Articles

If I’d invested £1,000 in Tesla stock a decade ago, here’s what I’d have now!

While many of us debate whether Tesla stock is worth the price today, it's undeniable that the EV share has…

Read more »

Investing Articles

Here’s what Michael Burry did as the BP share price dipped!

The BP share price has fallen from its peaks once again, and infamous investor Michael Burry may have spotted an…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

What on earth’s going on with the Barclays share price?

The Barclays share price has skyrocketed in recent months, becoming one of the best-performing stocks on the FTSE 100 since…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Analysts say this amazing FTSE 100 stock is a takeover target!

This FTSE 100 stock's one of the worst-performing companies on the index in 2024. So why might other companies want…

Read more »

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

5.4% yield! 2 UK dividend shares to consider for a £1,080 passive income

I think these UK shares could provide a large and sustainable passive income. And they could be great buys today…

Read more »

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »