I hold shares in Lloyds Banking Group (LSE: LLOY). Five years ago, where did I see the Lloyds share price going? We were emerging from the banking crisis, and banking dividends were coming back. Bank share prices hadn’t done much yet, but I was confident they’d be nicely ahead in five years time. Oh dear.
Go forward a year, and the Brexit referendum result gave the Lloyds share price a whole new kicking. We had to re-evaluate our banking investments, as they’d surely be irrevocably changed. There were huge cartloads of uncertainty suddenly heaped upon the sector. And the City folks really don’t like uncertainty. Still, the Brexit process surely couldn’t go on for too long, could it? And the uncertainty would be greatly reduced once we were out of the EU with a healthy trade deal in place.
And, oh dear, well… I’m sure I wasn’t alone in underestimating the government’s repeated ineptitude in getting things sorted. And here we are, two elections and two prime ministers later, approaching the end of 2020. And we still don’t have an EU trade deal. Or, by the time you read this, maybe we do. It seems make-or-break times are upon us, and I still can’t hazard a guess at what might happen in the next few weeks.
Oh, and then there’s that Covid thing, which really hasn’t been good for bank stocks. So where does the Lloyds share price go from here?
Lloyds share price valuation
Let’s look at the current valuation, now the Lloyds share price has been picking up.
I think it’s a waste of time trying to make any sense of 2020 figures. There’ll be a big fall in profits, for sure. But at least there should be a profit. In its Q3 update, Lloyds reported a nine-month pre-tax profit of £620m. That’s way down on the £2,562m in the same period last year, as the bank suffered heavy impairments due to the pandemic. But it’s still way better than the humungous losses we saw from banks during the financial crisis.
So, let’s look to 2021 forecasts instead, which suggest an impressively speedy earnings recovery. Analysts don’t expect pre-tax profit to get back quite to a 2019 level of nearly £4.4bn. But the £3.7bn they project goes a long way towards it. On that, we’re looking at a forward P/E of around 10 on the current Lloyds share price.
The dividend should be back too, with forecasts suggesting around 1.6p per share. That’s only around half the 2019 figure. But with the Lloyds share price so low now, it would yield 4.5%. But will the dividend progress further than that? Yes, I think that’s almost certain. The 2020 cut was at the behest of the PRA, and I think it did Lloyds a favour. The dividend was perhaps getting a bit overheated in 2019, and the bank can be a bit more cautious now without taking any blame.
So, in five years time? I reckon we could be seeing one of the best dividends in the FTSE 100. If I’m pocketing that, I won’t be too concerned where the Lloyds share price goes. But I’ll eat… err, something… if it isn’t a lot higher than it is today.
Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended 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.