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Investors who put £11,000 – the average UK savings – into Lloyds (LSE: LLOY) on 8 May last year have done well.
This would have bought them 20,754 shares at that day’s opening price of 53p. At today’s opening price of 72p those shares would be worth £14,942 – a £3,942 profit on the share price alone.
However, Lloyds also paid dividends totalling 3.17p over the past year. These would have added another £658 to the total returns of the stock.
Overall, an £11,000 investment in Lloyds over the year would have made a profit of £4,600. This annual return of nearly 42% dwarfs the FTSE 100’s total return over the same period of just over 6%.
For investors such as myself who are not shareholders I examined whether this sort of performance looks sustainable this year.
The engine under the bonnet
Powering any firm’s share price and dividends over time are its earnings. Consensus analysts’ estimates are that Lloyds’ earnings will grow by 13.7% a year to the end of 2027.
However, I think there are several major risks to this figure. One is the as-yet unknown level of compensation that it may have to pay due to mis-selling its car insurance.
Another is the uncertain interest rates outlook that could squeeze its net interest income (NII). This is the money made from the difference in interest paid out on deposits and received on loans.
And there is the significant price volatility risk resulting from its sub-£1 share price. At 72p, this means that every 1 penny in the share price represents 1.4% of the stock’s entire value!
That said, one positive factor in its otherwise poor 2024 results in my view was that underlying non-NII income rose 9% to £5.597bn. This reflects Lloyds’ attempts to substitute interest-based with fee-based business.
Overall, though, this did not prevent its underlying profit dropping 19% year on year to £6.343bn. This notably undershot analysts’ estimates of £6.7bn.
Are the shares undervalued?
Lloyds’ 10.9 price-to-earnings ratio is overvalued against its peers’ 8.8 average. These comprise Barclays at 7.6, NatWest at 8.2, Standard Chartered at 9.5, and HSBC at 10.
The same applies to its price-to-book ratio of 0.9 compared to its competitors’ average of 0.8.
Meanwhile, its 2.4 price-to-sales ratio looks fairly valued against the 2.4 average of its peers.
To put these numbers into share price terms, I ran a discounted cash flow (DCF) analysis. This identifies where any stock’s price should be, based on cash flow forecasts for a firm.
The DCF for Lloyds shows its shares are 53% undervalued at their current 72p price. Based on this, their fair value is £1.53.
That said, market forces could move them lower or higher than that. And although I have used other analysts’ cash flow forecasts for balance, I am not sure they adequately reflect the risks I see in the stock.
This equally applies to the dividend yield forecast, in my view. Analysts’ consensus is that this will rise to 5% in 2025, 5.8% in 2026, and 6.6% in 2027. They may, but again the risks look considerable to me.
Consequently, I am far from certain that Lloyds will repeat last year’s strong performance this year and I will not be buying it.
