Shareholders in Lloyds Banking Group (LSE: LLOY) have enjoyed a profitable few weeks. The Lloyds share price has leapt to be a FTSE 100 top-10 performer over the past month. But can LLOY continue this recent run of good fortune? Next stop 60p, perhaps?
The Lloyds share price leaps
Over one month, the FTSE 100 is up around 3%. Over this period, the Lloyds share price has leapt by almost a seventh, rising 14%. This places it at #10 among the Footsie’s top performers over 30 days. What’s more, LLOY is +7% over three months and ahead by almost a sixth (+16.4%) over six months. Over one year, the stock has gained 78.2%, bouncing back hard since ‘Vaccine Monday’ (7 November 2020). However, the shares have dropped by almost an eighth (-12.2%) over five years. In other words, this stock has been a short-term winner but a long-term loser. Yet I hold high hopes for continued gains for patient Lloyds shareholders.
As a leading UK retail bank, Lloyds stock is very widely held. Also, the group deals with 3om customers across 13 leading financial brands. It employs around 65,000 staff, many of whom buy discounted shares through group incentive schemes. Furthermore, the bank has existed in one form or another since 1695, so it’s been going for 326 years.
LLOY recovers from a summer slump
From June to September, the Lloyds share price swooned in the summer heat. On 1 June, the shares hit their 52-week intra-day high of 50.56p, but then headed south. By 8 September, they had dived 8.15p (-16.1%) to close at 42.41p. The very next day, I explained why I’d buy with LLOY trading at 42.5p. As I write on Thursday afternoon, the stock stands at 48.46p, up almost 6p (+14%) since then. This values the Black Horse bank at £34.4bn, up £4.2bn since my 9 September comments.
Could Lloyds hit 60p?
Right now, Lloyds shares look inexpensive to me, based on these core fundamentals:
| Price-to-earnings ratio | 7.4 |
| Earnings yield | 13.6% |
| Dividend yield | 2.6% |
For me, Lloyds shares seem undervalued, based on these key metrics. But what would they look like if, say, LLOY kept rising until it hit 60p? Here goes:
| Price-to-earnings ratio | 9.1 |
| Earnings yield | 10.9% |
| Dividend yield | 2.1% |
As a veteran value investor, these figures don’t look too demanding to me. Indeed, with Lloyds amassing billions of pounds of spare capital on its balance sheet, there’s room for the bank to splash the cash on shareholders. This might mean higher dividends (recovering after being cancelled in 2020) and share buybacks in future.
The big question is: what might propel LLOY to 60p and beyond? For me, the answer lies in higher earnings per share (EPS). These higher earnings might arrive from various sources. For example, falling loan-loss reserves would boost Lloyds’ profitability, while rising interest rates would lift its margins. Likewise, as consumer confidence increases, lending volumes might rise, boosting earnings growth.
But I suspect that the rocky road to 60p will not be easy for Lloyds shares. LLOY has been a volatile and unpredictable stock since the global financial crisis of 2007-09. And given the bank’s hyper-sensitivity to the wider UK economy, that is unlikely to change. In one week’s time, Lloyds releases its Q3 interim management statement. I don’t own LLOY today, so I’d wait to see this update before deciding to invest. Let’s see what news — good and bad — emerges on 28 October!
Cliffdarcy 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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