Is this as good as it gets for the Lloyds share price?

Harvey Jones is thrilled by the rising Lloyds share price, which has really delivered on its potential over the last year. Next year may be tougher.

| More on:

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.

I can’t believe the Lloyds (LSE: LLOY) share price. After declining for a decade, it’s finally pointing the right way. We’ve waited long enough.

Lloyds shares are up 36.95% over the past year, more than three times the 12.1% return on the FTSE 100 over the same period. They boast a trailing yield of 4.78%, lifting the total return to more than 40%.

Who saw that coming? I did, actually. I bought the shares in June and September last year, at an average price of 43.62p. Today, they trade at 57.84p, plus I’ve reinvested two dividends. I don’t often get my timing this right.

FTSE 100 income star

I felt the stock was due a revival but I didn’t expected it to happen while interest rates were still high, house prices stagnating, and consumer spending squeezed.

Yet it has. One reason is that investors are forward-looking. They think things will get better six to nine months down the line at which point rising wealth will drive up demand for savings and mortgage products.

Better still, this will cut debt impairments. In fact, that’s already happening. Lloyds now allocates just £57m to cover bad loans, against £243m last year.

Investors seem to be factoring in rather a lot of good news but the recovery will also bring challenges. When the Bank of England finally cuts base rates, this will erode Lloyds’ net interest margins, the difference between what it pays savers and charges borrowers. Margin compression has already begun and it hurts.

On 24 April, Lloyds reported that Q1 net interest margins had dropped from 3.22% to 2.95%, while operating expenses climbed. Profits fell 28% to £1.63bn. That doesn’t seem to bother investors. Lloyds’ shares have climbed 12% since then.

Investors have also chosen to ignore a potential motor finance mis-selling scandal, for which Lloyds has set aside a modest £450m. Any compensation bill could be much higher than that. Nobody knows.

This stock isn’t as cheap

Another problem is that the rising share price has driven down the yield. Last October, it spiked at 6.3%. Today it’s back down to 4.78%. That’s not bad, just not as good as it was. Let’s see what the chart says.

Chart by TradingView

Happily, markets forecast reckon the shares will yield 5.47% in 2025. Even better, they reckon net income will jump from £3.76bn in 2024 to £4.27bn in 2025.

Another concern is that Lloyds shares aren’t as cheap as they were. Today, they trade at 10.4 times 2024 earnings. I bought at close to six times. The price-to-book ratio has steadily climbed, too. Three years ago, it languished around 0.4. Today it’s close to fair value. Let’s see what the chart says.

Chart by TradingView

I have no intention of selling my Lloyd shares. I’ve got a pretty good allocation, and plan to hold onto them for years. Decades, if I’m lucky. Yet I won’t buy more today. I think other FTSE 100 high yielders now offer better comeback potential.

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.

Harvey Jones 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

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »

Investing Articles

Here’s my Rolls-Royce dividend forecast for 2024-27!

Our writer considers whether the Rolls-Royce dividend might be reinstated in coming years, based on financial performance and stated payout…

Read more »

Investing Articles

What would I do if Rolls-Royce shares plunged 50%? History suggests a big decline is coming

While Rolls-Royce shares have delivered massive outperformance in recent years, they also have a history of significant declines.

Read more »