Lloyds (LSE:LLOY) shares are up 209% over the past five years.
Back in October 2020, I could have picked up Lloyds shares for as little as 27p. Today that figure is 83p.
The stock has surged, but most of the growth has come over the past two years.
After all, banks went from one perceived crisis period to another. At first it was the pandemic, and then it was rising inflation and the cost-of-living crisis.
It’s only been in the last 18-24 months that we’ve really seen that pressure released. And bank shares have shot up as a result.
So, how much would a £5,000 investment five years ago be worth today? Well, it would be worth an impressive £15,500… almost. Plus investors would have received some juicy dividends during that period.
Remember, the dividend yield is sitting around 4% today. That means someone who bought when the shares were a third of the current value is receiving a 12% yield based on their original investment.
That’s £600 per year from a company with a rather sustainable dividend policy.
What about now?
Evaluating Lloyds shares today versus two/three years ago — when I was really loading up — is a very different exercise.
Back then, the market was gripped by pessimism over interest rates, loan losses, and the UK economy.
Today, those headwinds have eased, Lloyds’ balance sheet is stronger, and the valuation — while still undemanding — reflects a much healthier operating environment.
Currently, Lloyds is trading around 12.2 times forward earnings. I seem to remember during the Silicon Valley Bank fiasco it was trading below four times.
This is high for Lloyds, but earnings growth is expected to remain strong. This forward earnings figure falls to 9 times in 2026 and 7.6 times by 2027.
In fact, earnings per share could reach over 11p in 2027, according to the forecasts. That’s up from 6.2p last year.
In short, the growth trajectory is really impressive.
Some caution required
Strong earnings momentum, undemanding valuation and a surging share price… sounds great. However, investors should remain cautious. At these levels we may see some profit taking after the run-up.
Investors should also bear in mind that Lloyds is less diversified than its FTSE 100 peers — no investment arm. This could make it more exposed to a downturn in the UK economy — notably the property market.
Likewise, it’s worth remembering that lesser-known banks still trade at relatively depressed levels.
Arbuthnot Banking Group, for example, may be a better option to consider — albeit one that carries more risk given its size.
The bank trades at 8 times forward earnings and this falls to 5.6 times in 2027, based on the current projections. It also offers a 6% dividend yield, rising to 7.3% over the period. And its price-to-book ratio is half that of Lloyds at 0.53.
Having said all this, it’s a very different entity to Lloyds, focusing on specialised lending and high-wealth customers.
Personally, I believe Lloyds is still worth considering, but any share price growth could be slower and steadier from here. Arbuthnot, on the other hand, may offer more impressive returns.
