Down 19% to under £1, here’s why Lloyds shares look a bargain to me anywhere up to £1.80

Lloyds‘ (LSE: LLOY) share price has dropped 19% since its 4 February one-year-traded high of £1.14. But the bank is still doing what it does best: generating dependable profits from a huge, sticky customer base.

Its recent 2025 results showed net income higher, profits up, capital returns strong and costs well contained. These should enable it to keep buying back its stock, which can be long-term rocket fuel for per‑share earnings, dividends, and price gains.

So should I buy the stock now?

The dividend/buyback combo’s the real story

The headline yield is attractive on its own, but the total capital return (dividend plus buybacks) is where the real juice is.

On the former, analysts forecast the payout will rise to 4.25p this year, 5.03p next year, and 5.32p in 2028. That would generate respective dividend yields of 4.6%, 5.4%, and 5.7%. These are way above the FTSE 100’s present average of 3.1%.

Much of these forecasts come from the boost in earnings per share that results from ongoing share buybacks. In 2023, it bought back £2bn-worth, it did the same again in 2024, and last year it repurchased £1.7bn. In its 2025 numbers, it announced another £1.75bn share buyback programme for this year.

For long‑term income investors, that blend of high yield and ongoing share count reduction can be a powerful compounding engine.

More share price gains ahead?

Buybacks are also highly supportive of share price gains because the shares are then permanently retired from circulation. With supply reduced, even stable demand will push the stock price up, while higher demand will turbocharge the move.

As for where the price ends up, history shows that asset prices tend to converge to their ‘fair value’ over time. And to find out where Lloyds’ shares’ fair value is, I ran a discounted cash flow analysis.

This projects a business’s future cash flows and then discounts them back to today. Some analysts’ DCF modelling is more conservative than mine, others more aggressive. However, based on my assumptions — including an 8.4% discount rate — Lloyds’ shares are 49% undervalued at their current 92p price. This implies a fair value for the shares of around £1.80.

My investment view

A risk to the earnings growth upon which Lloyds’ share buybacks and dividend rises depend is a slower UK economy that could squeeze its profit margins. Another is any major regulatory change that could increase compliance costs.

However, consensus analysts’ forecasts are that Lloyds’ earnings will grow by a standout average of 12.1% a year over the medium term.

This looks well supported by the 2025 numbers, with profit before tax rising 12% year on year to £6.7bn, outstripping analysts’ forecasts of £6.4bn. As a result, Lloyds lifted its key profitability target — return on tangible equity — to 16%+ in 2026, against just 12% for 2025.

I already hold two stocks in the same sector — HSBC and NatWest — so adding another would unsettle the risk/reward balance of my portfolio. If I did not own these, I would seriously consider buying Lloyds now.

For other investors looking for long-term compounding from dividend and share price gains, I think the bank is well worth their attention.

The post Down 19% to under £1, here’s why Lloyds shares look a bargain to me anywhere up to £1.80 appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of Motley Fool Money. Simon Watkins has positions in HSBC Holdings and NatWest Group Plc. The Motley Fool UK has recommended HSBC Holdings and 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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