The Lloyds Banking Group (LSE: LLOY) share price set a four-year high in May, at 57.4p.
For a new five-year high, it would have to eclipse the 73.7p of late 2019, just before the 2020 stock market crash.
That would mean a 36% rise. Already up 13.5% so far in 2024, that could be a bit of a stretch. But I think there’s a decent chance of it happening, and I want to explain why.
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Second wind
Lloyds shares have gone off the boil a bit since reaching that 2024 high. They seem to scrape around the 55p level, but just can’t stay above it.
Still, that can happen when a stock is enjoying a bit of a recovery. We can reach a point where investors take a bit of their profit off the table, and the share price can pause a little.
We saw it with Rolls-Royce Holdings earlier in the year after its huge 2023 climb was followed by a bit of weakness. But it’s started back up again.
So can Lloyds emulate Rolls-Royce and get the bulls running again? I’d say it very much has valuation in its favour.
Super cheap
Lloyds shares are on a trailing price-to-earnings (P/E) ratio of only 6.4 based on 2023 earnings, and that’s well under half the FTSE 100‘s long-term average.
It looks like profits will fall this year, after a weak first quarter. But forecasts show earnings rising strongly again from 2025 onwards.
They’d put the P/E at about 7.3 for 2025, dropping as low as 6.4 again in 2024.
As an aside, the Rolls-Royce forward P/E stands at 32. It’s perhaps unfair to compare an aero engineer with a bank. But they’re both big favourites with UK private investors. And the same sentiment might just be there.
Share price rise
A new five-year high would push the forward 2025 Lloyds P/E to only 9.9. I’d still rate that as cheap. And the 2026 multiple would only reach 8.7.
We’re looking at a forecast dividend yield of 5.5% this year, up to 7% by 2026. So I really do think the valuation momentum is there. It just might need a bit of a nudge to get it moving.
And might that nudge come with an interest rate cut?
Most of the smart money would probably be on a cut by the autumn.
Margins vs property
That should slice into the banks’ lending margins. But Lloyds is the UK’s biggest mortgage lender so any easing of pressure on the housing market could be a big boost. And I reckon I see plenty of pent-up demand.
This is all speculative, and Lloyds does face some uphill struggles.
It’s had to make a provision of £450m related to motor finance troubles, and we don’t know where that will end. Stubborn interest rates could push the Lloyds share price own again too. And it might even go sub-50p again.
But that new five-year high by the end of 2024? I see a good chance of it.
