If you’re like me and you bought the majority of your Lloyds (LSE:LLOY) shares in 2022 and 2023, you’d be sitting on a handsome profit right now. The stock’s doubled in value versus some of my purchase prices, and that’s a really great position to be in.
What’s more, buying two years ago means the dividend yield on my original investments is over 7.5%. That’s simply because Lloyds has continued to increase its dividend payments over the period. Buying today, I’d expect a yield of 4.05%.
So what should I do now?
Could Lloyds trade higher?
Lloyds shares could certainly trade higher based on earnings expansions and re-rating of the stock. But these are potential future events.
Firstly, Lloyds is expected to continue growing earnings. The bank’s due to see earnings per share (EPS) growth from 6.68p in 2025 to 9.11p in 2026 and 10.99p in 2027.
This reflects a strong upward trajectory in profitability supported by net interest income growth and operational efficiencies. This also likely reflects the near-term expectation for impairment charges.
Correspondingly, the forward price-to-earnings (P/E) ratio’s projected to be around 11.5 times in 2025, rising to 8.6 times in 2026 before dropping to 7.2 times in 2027. In short, if this earnings trajectory plays out and analysts in 2027 forecast continued earnings progress then, absolutely, Lloyds could trade higher.
I also highlighted in a recent article that the bank trades in line with UK peers on valuation but below US counterparts. In other words, Lloyds could trade higher if the market were to assign them the same valuations as US peers.
Sadly, I don’t see that happening anytime soon. Banks are reflective of the state of the UK economy. Sadly too, while the headline data in the UK’s terrible — the economy will still grow in 2025. But I fear the economy isn’t in safe hands, and that’s important because sentiment really counts.
What I’m doing
In 2024, all of my UK stocks doubled, or came close to doubling in value. Sadly, that’s not something I’m going to be able to replicate year after year.
And as such, I’ve got to look at investments like Lloyds with a sense of realism. I do think it will deliver strong earnings growth in the coming years, and that should be a basis for some modest price appreciation.
However, I also accept that Lloyds isn’t a diversified offering — it doesn’t have an investment bank and is very UK-focused and could be more susceptible to downturns in the domestic market. That’s especially the case with the mortgage market where Lloyds is the number-one player.
So what’s the verdict? Well, I’m simply holding my existing shares. UK banks are well represented in my portfolio so adding more wouldn’t be great for concentration risk.
What’s more, my assumption is this stock will give me modest price appreciation coupled with a handsome dividend in the years to come. The current allocation’s appropriate for the risk/reward.
While I’m not buying more, I believe it deserves consideration from long-term investors.
