For much of 2025 it looked like £1 might be a stretching target for the Lloyds Banking Group (LSE: LLOY) share price in 2026. But it’s already within a few pennies of that lofty goal.
Some analysts are ruing the loss of Lloyds’ status as a passive income champion, now the 78% share gain in 2025 has knocked the forecast dividend yield down to just 3.4%. But those who see it that way… well, I think they have their short-term blinkers on.
More to come?
A consensus forecast suggests the Lloyds dividend should rise 35% between 2025 and 2027. That would lift the yield back up to 5%. And if profit forecasts prove good, we should see the dividend covered more than 2.3 times by earnings in 2027.
The Lloyds forward price-to-earnings (P/E) ratio is up at 14.5 for the current year. And I think that might be a bit high for a UK bank, especially one like Lloyds with no potentially lucrative international investment banking arm. But the longer-term outlook indicates a P/E steadying around eight to 10. And that’s the kind of sustainable level I’d like to see from my holding in Lloyds.
To me it all paints a picture not of a Lloyds bull run reaching its end, but more of ‘back to normal.’ It’s a scene of a domestic retail bank with solid consumer and business lending, and a big share of the UK’s mortgage market. Think the housebuilding business will get back on track in the next couple of years? I do, and it’s a reason I see Lloyds as still a potential cash cow for years to come.
What next in 2026?
That said, I don’t expect anything like a repeat in 2026 of the Lloyds share price gains of 2025. The year just ending was the year investors woke up and saw how crazily cheap our UK banks had been for years.
The most recent Lloyds upgrade I can see is from Goldman Sachs in December, with a new price target of 110p — from a previous 105p. That price would give Lloyds a P/E of about 11.5 for the end of 2026. If the intervening months unfold in the bank-friendly way I hope, I’d rate that as good value.
The UK economic recovery is, however, far from a done deal. The Bank of England has cut interest rates to 3.75%. But it was a knife-edge decision with the voting only 5-4 in favour. Governor Andrew Bailey said that “with every cut we make, how much further we go becomes a closer call“.
So where in 2026?
With bank share valuations the strongest they’ve been for some years, the sector is definitely not free from risk. But on balance, I reckon the Goldman Sachs target for the Lloyds share price could be a fair one. I’m not convinced it will go much beyond that in 2026, though. Lloyds remains a hold for me
