Lloyds Banking Group (LSE:LLOY) shares were the tenth-best performer on the FTSE 100 in 2025. During the year, the bank’s share price outperformed those of many of the ‘sexy’ tech stocks that Silicon Valley has to offer. That’s pretty good for a ‘boring’ bank that’s been around since 1765.
What’s more, it also paid 3.33p a share in dividends. It means those who bought on the first day of trading in 2025 have enjoyed an impressive yield of 6.1%. However, since 31 December 2024, its share price has risen by 80%. It means the yield’s dropped significantly. Let’s take a closer look.
Up and down
Since the pandemic, when all UK banks were instructed by the Bank of England to restrict payments, Lloyds has been steadily increasing its dividend. For 2025, the dividend is expected to be 80% higher in cash terms than it was in 2021.
But as the table below shows, despite this impressive rise, its share price has increased by so much that the stock’s yield has dropped below 4%, having been close to 6% for most of 2023 and 2024.
| Financial year | Share price (pence) | Dividend (pence) | Yield (%) |
|---|---|---|---|
| 31.12.21 | 47.80 | 2.00 | 4.2 |
| 31.12.22 | 45.41 | 2.40 | 5.3 |
| 31.12.23 | 47.71 | 2.76 | 5.8 |
| 31.12.24 | 54.78 | 3.17 | 5.8 |
| 31.12.25 | 98.24 | 3.60 (forecast) | 3.7 |
At the start of 2025, those looking to generate £100 a month in passive income would have needed to own 37,855 shares. Today (9 January), they would have to hold 4,552 fewer, assuming the 3.6p dividend forecast for 2025 is accurate. However, to achieve the same result — £1,200 in annual dividend income — they would now cost £12,476 more.
| Date | Share price (pence) | Dividends (pence) | Shares owned (no.) | Dividend income per year (£) | Cost of shares (£) | Yield (%) |
|---|---|---|---|---|---|---|
| 31.12.24 | 54.78 | 3.17 | 37,855 | 1,200 | 20,737 | 5.8 |
| 9.1.26 | 99.64 | 3.60 (forecast) | 33,333 | 1,200 | 33,213 | 3.6 |
Of course, shareholder returns cannot be guaranteed.
Cause for concern
To be honest, Lloyds shares are now too expensive for my liking.
Based on the consensus forecast of analysts, earnings per share will be 11.3p in 2027. This implies a forward price-to-earnings ratio of 8.8, which I don’t have a problem with. Based on history and others in the sector, a multiple at this level appears reasonable to me.
However, I believe the forecasts are too optimistic. I fear that investors have priced in too much of this performance improvement that, in my opinion, is unlikely to materialise.
| Measure | 2024 (actual) | 2027 (forecast) | Change |
|---|---|---|---|
| Net income (£m) | 17,117 | 21,252 | +24% |
| Total costs (£m) | 10,341 | 10,322 | – |
| Net profit (£m) | 4,477 | 6,820 | +52 |
I’m not convinced that the bank will be able to improve its net interest margin by 0.44 percentage points over a period when most economists are expecting interest rates to fall. Neither do I think it will be able to reduce its cost-to-income ratio from 60.4% to 48.7%. I believe it’s too reliant on the UK economy, which isn’t growing very quickly at the moment.
Final thought
Don’t get me wrong, I think the bank’s well managed and has lots going for it. But, in my opinion, it’s not worth £58.9bn, which is its current stock market valuation.
This makes me conclude that, although Lloyds is still offering a yield above the FTSE 100’s 3.1%, its 2025 share price rally means there are plenty of other stocks currently available offering a better return. And ones that are more attractively priced.
