Can the Lloyds Banking Group share price double your money?

The Lloyds share price has been rising strongly in recent days. Could it be the start of a double-your-money bull run?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Lloyds (LSE: LLOY) share price has rallied strongly in recent days. It’s currently above the 60p mark, a level last seen in May. Even after the rise, could buyers of the shares today look forward to doubling their money?

Deal or no deal

The market’s been in a flighty mood this year. A sniff of an orderly Brexit, and the pound strengthens and investors rush headlong into UK domestic stocks. A hint of a no-deal withdrawal, and the pound weakens and there’s a stampede into stocks with high levels of overseas earnings.

Projections for the UK economy in the event of a disorderly Brexit are dire, which would be bad news for domestic banks like Lloyds. However, I’d also question the default optimism on the UK economic outlook in the event of an orderly Brexit.

Deal or no deal, the economy is cyclical. As such, I’m looking at Lloyds in terms of where we are in the cycle, and whether its valuation offers a big enough margin of safety to double my money before the next earnings-and-dividend-crushing financial crisis and/or recession.

Crises and recessions

According to the latest Fiscal Risks Report from the Office for Budget Responsibility (OBR), the UK has experienced seven recessions in the past 63 years, and four ‘major’ recessions in the last 50. The OBR also notes, “we might expect the UK to suffer a financial crisis around once in every 20 years.”

One lesson from history is that however hard regulators try to suppress risk in the financial sector, bankers are infinitely creative in finding new ways to expose themselves to it and the potentially higher rewards it offers.

Writing in 1990, Warren Buffett put this down to what he termed “the institutional imperative.” He explained this as, “the tendency of executives to mindlessly imitate the behaviour of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.”

That was Buffett in 1990, but he could just as well have been writing about 2008–09 or any other financial crisis. It seems that bankers never learn.

The consequences for shareholders can be painful, because when assets are 15 or 20 times equity (as they are with banks), mistakes involving only a small portion of assets can destroy a large part of equity.

Double your money?

Maybe avoiding banks altogether wouldn’t be a bad strategy! However, I do think they present opportunities at times for value investors to buy low and sell high for a potential double-your-money return. Do I see Lloyds as one of these opportunities right now?

At a share price of 61p, it trades at a 15% premium to tangible net asset value (TNAV), at 8.3 times City analysts’ forecast earnings, and with a prospective dividend yield of 5.5%.

When I wrote in an article last month that I thought the time was finally ripe to start buying Barclays, the Barclays share price was at a 50% discount to TNAV, and at 6.5 times forecast earnings, with a prospective dividend yield of 6.5%. These metrics, particularly the eye-catching discount to TNAV, suggested a deep margin of safety.

Lloyds’ metrics, particularly the premium to TNAV, aren’t in the same value league. As such, I’m inclined to avoid Lloyds right now, as I see less downside protection and double-your-money potential.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

How I could make a 10% yield for high passive income a reality

Jon Smith explains how he can target high passive income from top-yielding stocks, including one specific example he'd consider.

Read more »

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »