After a bumpy few months, there’s a danger the Lloyds (LSE: LLOY) share price could dip below 50p for the first time since last March.
As a long-term investor in the FTSE 100 bank, I hope that doesn’t happen. Although if it does, it won’t change the investment case, in my eyes. I still think this is still a solid long-term hold for dividend income and share price growth.
The Lloyds dividend looks pretty secure, with a trailing yield of 5.2%. That’s now forecast to hit 6.4%, still nicely covered twice by earnings.
Can this FTSE 100 bank bounce back?
Unfortunately, the share price has been volatile. It’s up 12% over the last 12 months, but over five years it’s down 12%. And the bumpiness looks to continue.
There’s lots to like about Lloyds. Its shares are incredibly cheap, trading at just 6.96 times trailing earnings. Like every bank, it’s also benefited from rising interest rates, which allows them to widen net interest margins. With rates now forecast to stay higher for longer, those margins should remain wide.
There are downsides to higher rates though. They make mortgages costlier, hitting demand. That’s a blow for Lloyds, which is the UK’s biggest lender. Debt impairments could rise as borrowers struggle.
Higher interest rates also give investors a higher rate of income from cash and bonds, without risking their capital. This makes dividend stocks like Lloyds less attractive.
Everyone is a bit gloomy about the UK economy. That’s a problem for Lloyds, which is exposed to its fortunes due to its narrow focus on domestic retail and commercial banking. If we slip into recession this will squeeze consumer spending, business confidence, demand for loans, credit quality and profitability.
Lloyds is working hard to boost its efficiency via cost-cutting initiatives such as branch closures, and its digital transformation programme. Sceptics question whether the big FTSE banks can adapt to structural changes such as the rise of fintech, although they’ve seen off the challenger bank threat pretty handily.
I’m expecting a bumpy ride from this stock
The 19 analysts offering one-year forecasts for Lloyds have produced a median share price target of almost 65p. That would mark an increase of more than 20% from today’s 53p. Combined with that yield, this would give me a total return of more than 25%. We’ll see.
I’m a bit gloomy about the UK outlook right now. There’s another shadow hanging over Lloyds, in the shape of the motor finance mis-selling scandal. We don’t know how that could pan out, but broker RBC has warned the bill could hit £3.9bn. Lloyds has only set aside £450m. Let’s hope RBC’s wrong.
The Lloyds share price has a lot of room for growth and could hit 65p this year. But if the economy slides and motor finance turns into a new PPI, it could just as easily slump to 45p.
I’ve given up predicting the Lloyd share price. I’m just going to hold on to what I’ve got, and reinvest every dividend I get. Over the longer run, I think it’ll make me a lot richer. Albeit slowly and bumpily.
