2 reasons why the Lloyds share price could go higher (and 3 reasons why it might not)
Over the past five years, the Lloyds Banking Group (LSE:LLOY) share price has outperformed the FTSE 100. While the Footsie’s risen 74% since November 2020, the UKâs second-most valuable bank has seen its stock market valuation soar by 215%.
And after such an impressive rally, shareholders will probably be wondering whether this will continue. Letâs take a look at the arguments.
The bull case
- Strong growth prospects
- Attractive dividend
Analysts are expecting big things from Lloyds over the next three years. In 2024, the bank reported earnings per share (EPS) of 6.3p. By 2027, the consensus is for this to rise by 79% to 11.3p.
In turn, this is expected to drive a 51% increase in the dividend to 4.8p a share.
Another key measure for the sector is the return on tangible equity (RoTE). And a bit like EPS, brokers are expecting this to improve significantly. By 2027, this is forecast to be 4.7 percentage points higher compared to 2024. And given the huge scale of the bankâs operations, a relatively small improvement in its RoTE can have big consequences.
| Measure | 2024 (actual) | 2025 (forecast) | 2026 (forecast) | 2027 (forecast) |
|---|---|---|---|---|
| Earnings per share (pence) | 6.3 | 6.6 | 9.5 | 11.3 |
| Dividend per share (pence) | 3.17 | 3.60 | 4.10 | 4.80 |
| Return on tangible equity (%) | 12.3 | 12.2 | 15.7 | 17.0 |
| Net interest margin (%) | 2.95 | 3.06 | 3.25 | 3.39 |
| Cost:income ratio (%) | 60.4 | 58.7 | 50.9 | 48.7 |
With a forward (2027) price-to-earnings ratio of 7.8 and a potential dividend yield of 5.4%, the stock looks cheap. This should help drive the share price higher still.
The bear case
- Unrealistic forecasts
- UK exposure
- Possible windfall tax
Analysts’ growth forecasts appear to be overly optimistic. The anticipated earnings increase is driven by an expectation that the bankâs net interest margin will rise from the 2.95% recorded in 2024 to 3.39% in 2027. Most economists expect the Bank of England to cut interest rates over the next few years. Against this backdrop and an increasingly competitive market, itâs difficult to see how Lloyds can increase its margin so significantly.
It could be that the analysts have over-estimated by how much they expect the domestic economy to grow over the next three years. This is important because the majority of the bankâs income is earned in the UK. This means its results are sensitive to the performance of the British economy. Any downturn and the risk of bad loans will increase. Also, the level of new business is likely to decline.
In addition, most observers are expecting significant tax rises in Novemberâs Budget, which could damage consumer confidence. Thereâs also talk of a windfall tax being imposed on Britainâs banks. Poland recently implemented one to help pay for additional defence expenditure.Â
My verdict
On reflection, Iâm more convinced by the bearish arguments. If Iâm right, Lloyds’ post-pandemic rally could soon come to an end.
In my opinion, unless something changes dramatically, I donât see that thereâs much value left in the stock. I feel the analystsâ forecasts are painting too rosy a picture.
Iâm also of the view that the uncertainty surrounding the upcoming Autumn Budget makes it too risky to consider taking a position now. Therefore, on balance, the stockâs not for me.
The post 2 reasons why the Lloyds share price could go higher (and 3 reasons why it might not) appeared first on The Motley Fool UK.
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.
