Lloyds (LSE: LLOY) shares have been performing well. Since 9 November, when Pfizer announced it had developed a Covid-19 vaccine, Lloyds’ share price has jumped from 27p to 47p, which represents a gain of nearly 75%. Meanwhile, over a 12-month timeframe, the stock is up a little over 50%.
Are Lloyds shares worth buying today? Let’s take a look at the investment case.
Will the Lloyds share price continue to recover?
I think Lloyds’ share price could continue to rise from here. There are a few reasons why. The first is that business conditions for UK banks are improving dramatically now that vaccines are being rolled out.
Last week, the Bank of England said it expects the UK economy to grow 7.25% this year – the fastest rate in more than 70 years. This kind of GDP growth should benefit Lloyds which is, essentially, a play on the UK economy.
It’s worth noting that in Lloyds’ recent Q1 update, the bank upgraded its guidance for 2021. It now expects interest margin to be in excess of 245 basis points, versus previous guidance was 240 points. Meanwhile, it now expects a statutory return on tangible equity of between 8% to 10%, versus previous guidance of 5-7%.
The second is that City analysts are currently upgrading their earnings forecasts for the bank. Over the last month, for example, the consensus earnings per share forecast for 2021 has risen from about 4.3p to 5.6p. This kind of upgrade activity can boost a company’s share price.
The third is that sentiment towards beaten-up ‘cyclical’ stocks continues to improve. Recently, investors have been piling money into stocks that could benefit as the world reopens. I think this trend could continue for a while yet.
Finally, Lloyds has started paying dividends again. This is an issue I discussed last week. With the bank now intending to resume a ‘progressive’ and ‘sustainable’ dividend policy, it could attract income investors. This could boost its share price further.
Should I buy LLOY shares now?
Having said all this, Lloyds is not a stock I’d buy today. One reason for this is I have concerns in relation to the long-term outlook for the banking industry. I believe we’re going to see an enormous amount of disruption in this space from financial technology (FinTech) companies such as PayPal, Square, and Wise in the years ahead.
With many consumers now using digital wallet apps, such as PayPal and Cash App for savings and payments, banks’ access to cheap funding via current accounts is under threat.
Secondly, I think UK interest rates are likely to remain low for a while. This could hinder Lloyds’ profitability going forward as banks make a lot of their money from the spread between lending rates and borrowing rates (which is compressed when interest rates are low).
I’ll point out that I do own a few Lloyds shares in my portfolio. I’m going to hold on to them for now. However, I won’t be investing more capital into Lloyds. I think there are better stocks I could buy today.
Edward Sheldon owns shares in Lloyds Bank and PayPal. The Motley Fool UK owns shares of and has recommended PayPal Holdings and Square. The Motley Fool UK has recommended Lloyds Banking Group and recommends the following options: long January 2022 $75 calls on PayPal Holdings. 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.