Should I be worried about the red-hot Lloyds share price?

The Lloyds share price has surged in recent months, rewarding patient shareholders. But should I be looking to sell as the stock reaches new highs?

| More on:
Middle-aged white man pulling an aggrieved face while looking at a screen

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.

The Lloyds (LSE:LLOY) share price has bounced up and down over the past two years as rising interest rates delivered strong returns but promised higher, and costly, default rates.

However, since February, we’ve seen the stock consistently push upwards. Earnings actually fell year-on-year but the stock has gained largely because of improving sentiment regarding the UK economy.

So should we be concerned about the red-hot Lloyds share price? Is it time for investors to consolidate their gains and should potential investors stay clear? I don’t think so. Here’s why.

Things can only get better?

D:Ream’s ‘Things Can Only Get Better’ made headlines during the week as the song almost drowned out Rishi Sunak’s election date announcement. While I’m not convinced a new government has the capacity/fiscal headroom actually to make any difference to the UK’s economic trajectory, things (the economy) will likely get better anyway.

The UK’s economic forecast is relatively positive as we move towards in the medium term. And that’s incredibly important for banks because they are cyclical stocks. It’s even more important for Lloyds because it doesn’t have an investment arm, and around 60-70% of its loans are UK mortgages.

Falling interest rates

Coupled with an improving economic forecast is the expectation that interest rates will moderate. The current, higher interest rates are something of a risk for banks because sky-high repayments push customers closer to defaulting.

Interest rates are forecasted to settle somewhere between 2.5% and 3.5% in the medium term. This is the Goldilocks zone for banks because net interest income (NII) should be elevated and there are fewer concerns about defaults.

It’s important to note here that Lloyds is more interest rate sensitive than other banks because of the aforementioned reason — it doesn’t have an investment arm.

I think it’s fair to say however, that we’re not out of the woods yet. The latest inflation print came in above estimates, and if the Bank of England delays cutting interest rates, Lloyds shares would feel some pain. Some traders had been betting on a June rate cut. That’s looking increasingly unlikely.

It’s a marathon, not a sprint

Lloyds won’t deliver 17% share price growth every year — as it has over the past 12 months. However, if the UK’s economic woes improve and interest rates do fall as expected, we could be looking at something of a golden period for UK-focused banks.

Currently, Lloyds offers a 4.95% dividend yield. And it’s well covered by earnings. So that’s a great starting point if I’m looking to achieve double-digit total returns annually.

I’m being conservative here, but I reckon Lloyds shares could grow on average by around 5% annually over the medium term, taking the share price to 70p in five years. Given earnings projections, it would be trading around seven or eight times forecasted earnings.

So while there might be some more exciting investment opportunities out there, especially AI-related investments, I’m not selling my Lloyds stock. However, due to concentration risk, I’m not buying more.

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

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »