The Lloyds (LSE:LLOY) share price has retreated in recent weeks following renewed concerns about fines related to motor finance. However, this doesn’t dampen the long-term prospects of the UK’s third-largest bank by market cap.
Analysts remains largely positive on the firm. There are currently three ‘buy’ ratings, four ‘outperform’ ratings, 10 ‘hold’ ratings, and one ‘sell’ rating.
This is broadly positive and it‘s reinforced by an average share price target of 64.9p. That’s 22.5% above the current share price and infers the company is considerably undervalued at this time.
So, why is this? Let’s take a closer look at why most analysts believe Lloyds could be a great long-term investment.
Earnings trajectory is positive
Lloyds’s earnings forecast is promising despite a near-term dip in 2024 — which will likely reflect the impact of the aforementioned fine.
Earnings per share are expected to fall from 7.97p in 2023 to 6.69p in 2024, but a strong recovery is projected thereafter. Analysts anticipate a 10% increase to 7.39p in 2025, with further growth expected in 2026.
This positive trajectory is supported by Lloyds’s recent financial performance. The bank reported a statutory profit after tax of £3.8bn for the first nine months of 2024, with a return on tangible equity of 14%. Its strong capital position, with a CET1 ratio of 14.3%, provides a solid foundation for future growth.
Dividend prospects are particularly encouraging. Forecasts suggest a steady increase in payouts, with yields potentially reaching 6.7% by 2026. This upward trend in dividends reflects the bank’s confidence in its long-term financial health and commitment to shareholder returns.
An improving environment
The UK’s macroeconomic environment is set to improve in the coming years, potentially putting an end to a decade of underperformance, with forecasts indicating stronger growth than Europe from 2025 onwards. The OECD projects UK GDP growth of 1.2% in 2025, outpacing the eurozone.
This positive outlook could significantly benefit Lloyds, which is entirely focused on the domestic market. Further interest rate cuts could also stimulate lending and enhance profitability, while the unwinding of interest rate hedges could boost Lloyds’s earnings by up to 80%.
Moreover, falling inflation and rising real disposable income are likely to increase consumer spending and borrowing. As the largest mortgage provider in the UK, Lloyds stands to gain from a revitalised housing market.
Hold through the volatility
I’m not buying more Lloyds shares because my exposure to UK banks is already higher than I’d like — including Lloyds. However, that doesn’t mean I’m not bullish on Lloyds.
I accept that there could be volatility for a host of reasons. If this motor finance fine comes in larger than anticipated, we could see the share price react negatively. But bank shares react to a host of macroeconomic events.
As such, I see Lloyds as a stock for investors to consider buying and holding for the next decade. The dividend yield could grow to around 10% by 2034 based on current prices. And, assuming the next decade is more stable for the UK than the last — no Brexit, no Covid — the stock’s valuation could move closer in line with American peers that currently trade around 11-14 times earnings.
