Lloyds’ (LSE: LLOY) share price sits around an 18-year high, yet there may still be further major gains ahead. This is because price and value are different things when it comes to shares.
Price is just a function of market supply and demand for a stock at any given time. But value reflects the true worth of the underlying business’s fundamentals.
As legendary investor Warren Buffett put it: “Price is what you pay; value is what you get.” He also urged investors to focus on companies whose value exceeds their price.
So, how much are Lloyds shares really worth right now?
Powering up with earnings growth
Ultimately, every company’s share price is driven over the long term by earnings (‘profits’) growth. A risk here for Lloyds remains outstanding compensation claims for historic motor finance mis-selling. The FCA scheme remains under consultation, leaving the final liability unresolved until rules are published in February/March this year.
Nonetheless, the consensus forecast of analysts is that Lloyds’ earnings will increase by a yearly average of 10.5% to end-2028.
This looks well supported by its results. Its full-year 2025 numbers released on 29 January showed profit before tax rising 12% year on year to £6.7bn. This beat analysts’ forecasts of £6.4bn.
The bank also significantly lifted its profitability target. It now expects to make a return on tangible equity greater than 16% in 2026, having forecast just 12% for 2025.
It also announced a £1.75bn share buyback, which is generally supportive of share price gains. This brings the total capital returned to shareholders in 2025 to £3.9bn (including dividend payouts). Analysts forecast the current 3.4% dividend yield will rise to 4.7% in 2027 and 4.8% in 2028.
How undervalued is the stock?
Discounted cash flow (DCF) analysis estimates a company’s ‘fair value’ by projecting its future cash flows and then ‘discounting’ them back to today.
Some analysts’ DCF modelling is more conservative than mine, depending on the variables used. However, based on my DCF assumptions — including an 8.3% discount rate and a 14% stable return on equity — Lloyds looks 39% undervalued at its current £1.08 price.
Therefore, its fair value could secretly be close to £1.77 a share.
And because share prices can trade towards their fair value in the long run, this suggests a potentially tremendous buying opportunity to consider now… if this modelling proves accurate.
My investment view
I already hold two banking stocks — HSBC and NatWest — in my portfolio. Adding another would skew its risk-reward balance, so Lloyds is not for me right now.
Even so, it looks like a classic case of a solid business whose market price still lags its underlying value.
Resilient cash generation, tight cost control and a growing contribution from fee-based businesses underpin Lloyds’ earnings outlook. Meanwhile, capital strength continues to support dividends and buybacks.
Consequently, I think the stock is well worth the attention of other investors.
