Are Lloyds shares really worth £1?

Lloyds (LSE:LLOY) shares are a popular investment among UK retail investors. And for those who bought two or three years ago when the likes of John Choong and I were screaming about it, it would have been a very successful investment indeed. The stock has more than doubled in value.

A few years ago it seemed farfetched to believe that Lloyds shares could trade for £1 as they had done some 15 years before. However, it now appears highly possible that the stock could push out of penny territory and into the pounds in the near future.

So, is it really worth £1 per share? Let’s explore.

What the valuation tells us

Lloyds shares look more expensive than their peers on face value. The stock trades around 13.4 times forward earnings, which is quite incredible as it was trading around five times projected earnings back in 2023 when the Silicon Valley Bank fiasco occurred.

However, it’s worth noting that Lloyds is expected to grow earnings at a considerable pace in the coming years. Projections suggest this price-to-earnings (P/E) ratio will fall to 12.1 times in 2026 and then 9.2 times in 2027.

This still makes it more expensive than many of its peers, but it’s a good dividend payer too. The current yield is around 3.75% and this could reach 4.6% by 2027. This assumes today’s price and consistent dividend payment improvements.

And then there’s the price-to-book (P/B) ratio. This tells us how much investors are willing to pay for each £1 of the bank’s net assets. The P/B ratio here is 1.12. This doesn’t necessarily mean the stock is overvalued; rather, it suggests that investors have confidence in the bank’s ability to generate strong returns on its assets.

However, collectively this suggests that the stock is trading around fair value.

In other words, I’m not sure there’s enough evidence for a re-rating. A stock’s re-rating is the changing of its valuation by the market, leading to a substantial increase or decrease in the P/E ratio.

And in order to hit £1 a share, Lloyds shares would need to advance another 10%.

Catalysts needed

The stock market can be unpredictable. And sometimes there are additional factors at play. Lloyds shares could shrug off my valuation concerns purely because of FOMO. Investors — often incorrectly — love to jump on surging stocks.

Other than that, it may take a catalyst to push the stock higher. That could be a big earnings beat or a revision on guidance. Of course, these events are very hard to forecast.

And while Lloyds is one of my biggest holdings — and I plan to hold it for the very long term — I think that caution is warranted. We have a fiscal/doom loop in the UK, a government that’s in need of more income, and a highly focused (un-diversified) bank in Lloyds.

I still believe Lloyds is worth considering for the long run, although there’s likely better value elsewhere.

The post Are Lloyds shares really worth £1? appeared first on The Motley Fool UK.

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James Fox has positions in Lloyds Banking Group Plc. 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.

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