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3 reasons why I think the Lloyds share price could rise

Image: Lloyds Banking Group

The Lloyds (LSE: LLOY) share price is up 35% in 2021 so far. The stock has increased by almost 50% in the past 12 months. Of course, previous performance isn’t indicative of future returns.

The Lloyds share price has been treading water around the 50p marker. I’d buy the stock and I reckon it could rise further. Here are three reasons why I think this could happen.

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#1 – UK economy

Lloyds is a bank with a sizeable mortgage business. In fact, it’s the largest home loan lender in the UK. So it’s no wonder the shares have been buoyed by the stamp duty holiday. The stock is also linked to how the UK economy is doing.

Last month, the Bank of England (BoE) raised its forecast for UK GDP growth to 7.25% in 2021, up from 5%. It believes that rapid progress from the Covid-19 vaccine programme and the easing of lockdown restrictions could lead to a boom in activity.

To add some more perspective, the BoE also announced in May that the UK economy could see the strongest growth since the World War II. This is a huge statement. And if this turns out to be true, I think this could boost the Lloyds share price.

#2 – Diversification

As I mentioned in my first reason, Lloyds has a large mortgage book. But a bank (or any other business) shouldn’t put all of its eggs in one basket. It clearly needs to diversify its revenue in order to survive and thrive. That’s exactly what Lloyds is doing and I think it could be positive for the shares.

Firstly, it’s expanding its financial planning services and can leverage off its wide customer base. Secondly, the bank is also improving its offering to small and medium-sized businesses.

Both services should help Lloyds as these types of customers will most likely need assistance coming out of the pandemic. The bank already has a strong brand and reputation, which should work in its favour.

#3 – Dividend

Prior to the coronavirus crisis, Lloyds shares were generating a dividend yield of approximately 5%. It was a great stock to hold just for the income. But then the pandemic happened and the UK regulators intervened. The bank had to suspend its dividend last year in order to preserve capital during Covid-19.

Obviously this is not what any income investor wanted to hear. And so the Lloyds share price took a hit. Fast forward a year and the bank has paid a small dividend. This is the maximum it can pay out under the guidelines set by the regulators.

Investors are awaiting of further developments on the dividend front. The firm releases its half-year results in July so I reckon an announcement on the income payment could be made then. A rise in the dividend could boost the Lloyds share price.

Risks

Of course, there’s no guarantee the mortgage lender will increase its income payment. If it doesn’t, then this may be seen as a negative thing and could impact the stock.

There’s also no certainty that the UK economy will bounce back according to the BoE’s estimates. In fact, the BoE announced today that it had raised its expectations for inflation but downplayed the risk to the recovery.

Despite these concerns, I’m confident on the long-term prospects for Lloyds. Hence, I’d buy the stock.

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Nadia Yaqub has no position in any of the shares mentioned. 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.

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