The Lloyds Bank (LSE: LLOY) share price rose to its highest level in a year recently. It rose a little above 50p before dipping slightly. This sounds like progress, but I reckon that much more progress is possible.
Consider this. The Lloyds Share price is still over 20% below where it was during its highs of January 2020, before the pandemic panic started. And this makes the stock stick out to me among FTSE 100 companies. Many of them have not just reached pre-pandemic levels, they have long surpassed them.
In fact, I reckon that the bank is among the minority of recovery stocks that are still in process of getting back on track. Some of the others include more FTSE 100 banks and travel stocks. This alone means that its share price may well be undervalued, I feel.
What’s holding the Lloyds Bank share price back?
In my view, 20% is the least that the stock could rise now. I reckon that such an increase could be possible soon after the regulators allow it to set dividends at its own discretion. Right now they are tied to banks’ lending as well as their earning levels, making their dividends uncompetitive compared to most FTSE 100 stocks. But as I said in my last article on Lloyds, the removal of these restrictions could help its dividend yield to rise significantly.
Yet that might take some time to happen because at present, the economy still appears to be vulnerable. The latest data on growth shows a muted recovery even after the easing of lockdowns. And coupled with high inflation, the threat of the recovery being derailed is higher than before. So I am not sure if the regulators will allow banks to distribute big dividends in a hurry.
Rising Covid cases could spook FTSE 100 investors
The economy is among the reasons why the Lloyds Bank share price could stay sluggish in November. But there are other reasons too, like the pandemic. Patients admitted to hospital with Covid-19, and deaths due to the virus, are on the rise once again in the UK, which could mean some nervousness among investors. This is especially so as we get into the winter season, which can worsen the spread of respiratory diseases. Among FTSE 100 banks, this could impact Lloyds the most, considering that it is more UK-centric than the others, like HSBC and Barclays.
Rising business confidence
But there are balancing factors too. Even if the present challenges stop the bank’s share price from rising, these could at the very least ensure sideways movement. The first of these is optimism about the future. The bank’s own Business Barometer survey released a few days ago, showed that business confidence in October was at its highest level since March 2020.
Some 60% of the firms surveyed said that they will bring back all furloughed staff and another 30% intended to bring more than half of them back. This bodes well for the labour market, according to the firm’s economists. Since a thriving labour market indicates potential for higher consumption and general buoyancy in the economy, it should continue to bode well for Lloyds as well.
Buoyant stock markets
I think the stock could also continue to receive support from the overall bullishness of the markets, if it continues. As I write, the FTSE 100 index is trading at just a little over 7,300, which is close to a new one-year high it reached recently.
A broadly rising index can lift stock prices across the board. As a result, stocks that have already made significant gains over the past year can start looking uncomfortably pricey very soon. Consider stocks like the Primark owner Associated British Foods, which has a price-to-earnings (P/E) ratio of almost 37 times. Or how about the water and wastewater utility Severn Trent with a P/E of 31 times.
By comparison, Lloyds Bank has a P/E of 7.5 times only, which can make it more attractive. In one of my recent articles on the firm I had calculated how much its share price could rise based on these multiples and the outlook for its future earnings. I concluded that its share price could potentially double over the next year or so. That is not guaranteed, of course, but I am optimistic that we might begin to see an increase this month.
What I’d do about the Lloyds Bank share price
To sum up, it is clear that there will continue to be forces both pulling back the bank’s share price and driving it forward this month. Among those pulling it back is its dividend yield, which is lower than that for the average FTSE 100 stock. And coronavirus numbers are already rising and could get worse during the winter months, possibly hurting investor confidence. This could particularly impact cyclical stocks like banks, including Lloyds.
On the other hand, at present the stock market is in a pretty good place. This could balance out any pandemic fears over the next few months. It might just override them completely as well. Lloyds’ business confidence survey certainly suggests some optimism among companies, which could also be good for the economy. This in turn could drive up the share price.
On balance, I am quite keen on buying Lloyds Bank stock now. I think the odds are stacked more in favour of it than not. Its recent results were pretty good. And interest rates are set to rise sooner rather than later. These could mean improved margins for the bank.
Also, despite appearances to the contrary, the economy should pick up speed soon. This could perhaps even relax the regulator enough to allow Lloyds to set its own dividends. I will buy it soon, with the hope that it might even double my money over time and earn me some nice dividends along the way. And I am hoping that the share price could start rising this month.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods, Barclays, HSBC Holdings, and 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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