With its large bank network and £33bn market capitalisation, it can be easy to forget that Lloyds (LSE: LLOY) in fact trades as a penny stock. It’s the highest-valued UK penny stock by far. But that doesn’t detract from the fact that the Lloyds share price languishes significantly below its peers.
That relative underperformance could yet change. The bank’s shares have put on 66% over the past year. Below I consider whether they could top 60p in the next year, which would require around a 30% increase from today’s price.
Positive drivers for the Lloyds share price
While 30% in the next year might sound a less challenging rise than the shares managed over the past 12 months, it won’t just happen for no reason.
But I do see some possible drivers to push the Lloyds share price up to 60p. One of those is the continued resilience of the UK economy. The bank is the largest mortgage lender in the country. That means any shift in the economy can impact the bank’s business results. Early in the pandemic, Lloyds made large provisions against possible defaults. Fortunately it was later able to release most of them, boosting confidence in the quality of its mortgage book. As the UK economy and housing market continue to perform well, that could improve investor confidence in the outlook for Lloyds.
The bank’s restoration of its dividend this year has improved the investment case, but I reckon there could be more good dividend news still to come. After all, the dividend languished well below where it stood before being scrapped last year. But in the meantime, the bank’s CET1 ratio has improved. In layman’s terms, that means it is now sitting on a larger pile of surplus cash, which it could use to boost dividends.
Why I think the Lloyds share price could hit 60p
Could that bull case already be reflected in the share price? After all, it has increased by two thirds in a year.
The reason I think the price could increase further is that the current valuation still looks cheap to me. In its first half, Lloyds reported earnings per share of 5.1p. On that half alone, the price-to-earnings ratio is around 9 even if the second half brings no additional profits. While the second half may be weaker than the first half, hopefully it will still produce positive earnings. In that case, the price-to-earnings ratio would be less than 9. For a blue chip bank of Lloyds’ quality to have a price-to-earnings ratio in the single digits makes it look undervalued to me.
Risks with Lloyds shares
But the Lloyds share price hasn’t been at 60p since the start of last year. Can it get back there given the economic long tail of the pandemic?
There are risks, even if the economy stays strong. For example, the bank’s move into being a landlord could distract management time from the challenge of keeping the bank competitive. Mounting competition from fintechs could also put profit margins at big banks like Lloyds under pressure. Despite that, I think we could be toasting a 60p Lloyds share price before the end of next year.
Christopher Ruane owns shares in Lloyds Banking Group. 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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