The Lloyds (LSE: LLOY) share price has had a decent run, although not as decent as FTSE 100 rivals Barclays or NatWest. That momentum paused on Friday when the stock dropped 3.38%. UK banking shares were hit across the board, with investors rattled by talk of a windfall tax in the autumn Budget.
A paper from the Institute for Public Policy Research called for a levy to reclaim “windfalls” linked to quantitative easing, and the prospect wiped £6.4bn off the sector in a single day.
NatWest was the heaviest faller, sliding 4.85%, while Lloyds slipped more than 3% and Barclays was down 2.24%.
FTSE 100 tax targets
Yet investors should put that in perspective. Even after the drop, Lloyds shares are still up 36% over the past year and 180% over five. Dividends on top have made them even more rewarding. Especially if reinvested.
Yet we can’t totally dismiss the threat. Banks provide a tempting revenue source for any government under pressure. Raiding them may even prove popular with voters, who still haven’t forgiven them for the financial crisis.
The raid, if it happens, is expected to cost the banks £3bn to £4bn a year in total. These sums aren’t existential. Lloyds posted a full-year underlying profit of £6.3bn in 2024, and returned £3.6bn to investors through dividends and share buybacks. Even so, Budget speculation is likely to overshadow the shares for the next few months. There’s also a chance they won’t happen at all, as the government battles to get the economy growing.
Half-year results solid
Best not to overthink these things. When investing in stocks and shares, there’s always something to worry about. Before the Budget, investors were fretting over the impact of the Supreme Court ruling on car loan mis-selling on Lloyds. Many feared the bill would run to billions, but more modest sums are now on the table. Lloyds’ existing provisions might even cover the bill.
Today, the shares trade just below 80p. Goldman Sachs recently confirmed its 12-month price target 99p, which would suggest a 25% increase from here, with dividends on top. The forecast yield is 4.5%, covered 2.1 times by earnings, so that could lift the total return towards 30%. As someone who holds Lloyds shares, I’d be thrilled with that. Only time will tell.
Banking stock valuation
Lloyds doesn’t look too expensive, with a price-to-earnings ratio is around 13. However, the price-to-book multiple has climbed from 0.6 a couple of years ago to 1.1 today. So it’s not dirt cheap either.
If inflation eases over the next year and we get more interest rate cuts, the housing market should benefit, which helps Lloyds as the country’s largest mortgage lender via subsidiary Halifax. The downside is that lower rates would squeeze net interest margins. Swings and roundabouts, as ever.
For me, the long-term case is still attractive. There will always be threats – political, economic, regulatory, you name them. These can also be opportunities, to consider buying on a dip. If we get a bumpy autumn, that could offer an entry point for patient investors. Another benefit is that reinvested dividends will pick up more stock at the lower price. I’m not parting with my Lloyds shares, and I’m keen to buy more if I get the chance.
