Over the last 12 months, the Lloyds Banking Group (LSE:LLOY) share price has gone from 58.5p to 79.4p. That’s a 36% gain, but the question is, can it keep going?
In general, stocks go higher because either the company’s earnings per share (EPS) increases, or it starts trading at a higher multiple. So could either of these happen for Lloyds shares?
Earnings growth
Let’s start with earnings. Lloyds has seen its EPS go from 1p to just below 6p over the last five years, but the bank‘s going to have to deal with a number of challenges in the near future.
One of the biggest is the likelihood of lower interest rates. This is likely to weigh on lending margins, though the effect should be less dramatic in the short term.
A second is the ongoing motor loans issue. The Supreme Court has ruled in the bank’s favour, but the Financial Conduct Authority is consulting on a redress scheme, which could be expensive.
A third risk – that has been catching investor attention over the last few days – is the threat of a windfall tax. This caused the stock to fall on Friday (29 August) and is worth taking seriously.
Lloyds however, has an important weapon up its sleeve. Since 2020, the firm has been using its excess cash to repurchase shares and this has reduced its outstanding share count by 11%.
That should go some way towards limiting the effect of the above risks on the company’s EPS. But the road to higher earnings per share from this point has a number of obstacles.
Multiples
If EPS holds steady – which looks optimistic to me – the road to a £1 share price depends on the stock trading at a higher multiple. But that also seems ambitious to me.
Lloyds shares currently trade at a price-to-earnings (P/E) ratio of 12. That’s well below the FTSE 100 average, but near the top of where the stock’s been trading over the last five years.
With EPS just below 7p, a £1 share price implies a P/E ratio of 15. That wouldn’t be unheard of, but it’s above the level the stock has generally been trading at recently.
In general, price multiples reflect investor expectations about forward earnings. A higher P/E ratio suggests optimism about the company generating higher profits in the future.
This is essentially what happened on Friday. News of a potential tax hit didn’t do anything to earnings, but it did change the multiple investors were willing to pay for the stock.
That means Lloyds trading at a higher P/E ratio is going to need investors to find a cause for optimism about future earnings. And that’s hard to see at this point.
The road to £1
I think it’s hard to see how the Lloyds share price gets to £1 in the near future. But investors should note that things can turn around very quickly in the banking sector.
If the obstacles to EPS growth subside, the stock could get a boost from both earnings growth and a higher multiple. So while I’m looking elsewhere for opportunities right now, I’m not ruling it out.
