The Lloyds (LSE: LLOY) share price is finally living up to its potential after the long, exhausting process of rebuilding the business after the financial crisis.
It’s now up 40% over the last 12 months and 117% over five years. That doesn’t include dividends, which have added another chunk to total returns.
This is one of the attractions of buying shares that have fallen out of favour. I bought shares in Lloyds three times in 2023, when the price-to-earnings ratio was around six or seven and the price-to-book value was as low as 0.4.
Today, my shares are up more than 70% and with dividends reinvested, I’m close to doubling my money. Contrarian investing doesn’t always pan out like this, though.
No stock climbs forever. The price-to-earnings ratio has now crept above 12, and the price-to-book is 0.98, roughly in line with fair value. So I wouldn’t call Lloyds a massive bargain today.
Growth momentum fades
Recent results have been okay but not great. First-quarter numbers, published on 1 May, showed pre-tax profits down 7% to £1.53bn, as costs rose.
Net income climbed 4% to £4.4bn, but the bank also lifted its impairment charge to £309m, from just £57m a year earlier.
That included a £100m provision linked to the US tariff threat, which it said posed “downside risks” that weren’t fully captured by earlier modelling.
Lloyds also set aside another £700m to deal with motor finance commission complaints. That takes the total above £1bn and we still don’t know how high the real figure will be.
Operating margins are forecast to climb from 17.4% to 41.9%. That’s impressive if it comes off. The bank is also treating shareholders to a £1.7bn share buyback, which should add value by shrinking the share count.
The trailing yield isn’t as high as it was at 4.1%, but it’s nicely covered twice by earnings. The forecast yield is 4.4% covered 2.1 times. That gives me confidence that payouts can be maintained. Reinvesting those dividends has made a big difference to my returns over the last couple of years.
Forecasts look fair
The analyst community are cooling slightly. Of 19 brokers giving one-year recommendations, six name Lloyds a Strong Buy and one says Buy. Eleven say Hold, which suggests the easy gains have already been made. Only one says Sell though.
Their median 12-month price forecast is 83p, a modest 8.3% increase on today’s 76.5p. Add in the 4.2% yield and investors might be looking at a total return of around 12.5%.
That would lift a £10,000 investment to £11,250. While it marks a slowdown, growth is growth. I’m investing in Lloyds to get rich slowly, and that would still be another step in the right direction.
Slow and steady
There are risks. Interest rate cuts might lift mortgage lending, but could also squeeze margins. The motor finance scandal still looms. The UK economy has stalled, and given its domestic focus, Lloyds cannot look elsewhere for excitement.
Even so, I think its shares are worth considering today. Growth may be slower from here, but with dividends reinvested, I believe the stock should still reward patient investors over the long-term. I plan to be one of them.
