Lloyds (LSE:LLOY) shares remain an attractive proposition for investors seeking a mix of dividends and share price growth. That’s my opinion, anyway.
But if I had started investing in the FTSE 100 bank two years ago, I’d be a very happy individual today. Over the period, the stock has surged 26.2% from around 44.91p per share.
That means a £1,000 investment two years ago would be worth £1,262 today. Moreover, I’d have received around £120 in the form of dividends during the period.
As such, my total returns would almost be equal to 40%. That’s an incredible return.
Can Lloyds keep returning for investors?
The forecasts are really positive for Lloyds, and this is why the stock has surged over the past few months.
While 2024 isn’t going to be the company’s best year on record, things may improve throughout the medium term.
Earnings per share (EPS) — the all-important measure of profits — is expected to rise from 5.9p per share in 2024 to 6.9p in 2025 and 8.3p in 2026.
Hedging its bets
One of the reasons for this is the unwinding of Lloyds’s hedging practices. Banks practice ‘hedging’ in order to reduce their exposure to fluctuations in interest rates.
There are several ways to think about this, but essentially it’s the strategic use of financial instruments to avoid sudden changes in interest-related revenues.
An easy way to think of this is in government bonds. Banks buy lots of government bonds, and some of these bonds from say five years ago will have low yields.
But the bonds they’re buying today have much higher yields, and this serves to pull the bank’s net interest margins upwards, extending the boost of higher yields throughout the medium term.
In fact, analysts suggests Lloyds’s net hedge income could exceed £5bn in 2025.
Brokers still positive
Lloyds stock didn’t perform overly well at the beginning of August, and one reason for this was analysts changing their forecasts on the bank.
Citi downgraded Lloyds to neutral, noting it was the only big UK bank to miss pre-provision profit forecasts. RBC Capital Markets downgraded Lloyds from ‘outperform‘ to ‘sector perform‘ after hitting its 60p target.
Analysts still remain largely positive on Lloyds, even after the stock surged. There are currently four ‘buy’ ratings, four ‘outperform’ ratings, nine ‘holds’, and just one ‘sell’.
The average share price target currently sits at 62p, suggesting the stock is 8.2% discounted.
The bottom line
Lloyds is a business with momentum, but like any investment, there are risks. The company has set aside £450m to cover a potential motor finance fine, but that may fall short of what is required. We may not know how big the fine is until next year.
Likewise, the economy needs interest rates to moderate, and Lloyds is often considered a bellwether for the UK economy. Some CPI or labour market shocks, or even just the return of Donald Trump to the White House, could delay further rate cuts.
But back to the positives.
Earnings are growing, and the bank is trading at a considerable discount versus its international counterparts, especially on medium-term earnings expectations. Coupled with a 4.7% dividend yield, it’s an important part of my portfolio.
If I wasn’t already heavily invested in UK banks, I’d buy more.
