At 78p a pop, Lloyds (LSE: LLOY) boasts the second-cheapest share price on the FTSE 100. The share price is an arbitrary number, of course. It doesn’t reflect the actual value I get from buying it. But it’s rare that a company as old, as large and as prominent as the black horse bank still has shares that trade for pennies.
The key detail for budding investors is that the shares are on a tear and — I think — may not be bought for a single pound coin for very much longer.
Good, good news
The surge began shortly after the pandemic when the shares leapt nearly three times in value on the back of higher interest rates. When rates are high, banks like Lloyds can find a lot of room to manoeuvre between the rate they borrow at and the rate they lend at.
Higher margins lead to higher earnings that have been used on share buybacks and a weightier dividend which, all else being equal, tends to push the share price up. Rates are expected to stay high in the coming years too. Gilts indicate so, at least, with 10-year gilts up to around 4.7% now.
Other good news for Lloyds has come more recently on a brewing scandal. It has been dragged into the courtroom in a car finance case. One worst-case scenario puts the bank on the hook for a £4.6bn fine – that’s more than it earned last year!
Lloyds hasn’t escaped punishment yet (no verdict has been reached), but CEO Scott Nunn is confident there has been no mis-selling of car loans. After he said there was “no evidence of harm”, the shares jumped 5% in a day.
One downside for an investor considering the stock is its valuation. Lloyds shares used to look cheap below the 50p mark. At fresh highs of 78p? Not so much. The price-to-earnings ratio has grown to over 12. That’s the priciest of the ‘big five’ banks. NatWest at nine times earnings and Barclays at eight times earnings both look inexpensive by comparison.
Analysts are cool on the stock too. Of the 19 analysts covering Lloyds, 11 have it down as a Hold. The average price target is 80p, only a couple of pence from its current value.
Prediction time
Even the most bullish of these only predict a 95p price target over the next 12 months. Not a single one is expecting it to break the £1 mark!
Lloyds may stop trading in pennies in the near future, but it will have to defy the analysts’ predictions to do so.
I believe an investor who wants a solid dividend stock with good long-term prospects should consider Lloyds for their portfolio. As for when it will stop trading in pennies, I expect it to happen in the coming years. Though I’ll side with the analysts on this one and predict the £1 mark isn’t getting broken in the next 12 months.
