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During the dark days of the pandemic, Lloyds Banking Group (LSE:LLOY) shares were trading close to 26p. Now (20 September), they are changing hands for 111p. This 327% increase is remarkable.
But it’s the future that really matters. So let’s take a closer look at what the City thinks will happen over the next year or so.
A great return
To be honest, I’m fascinated by analysts’ predictions. Why? Because they believe the bank’s shares are 13.5% undervalued and, if their dividend forecasts are correct, the stock’s forward yield is 4.6%.
It means anyone investing £5,000 today could see it grow to £5,675 by September 2027 and, as an added bonus, receive income of £230. That’s a total return of £905 (18.1%). I’m sure most investors would be happy with that.
So what could go wrong?
Trouble ahead?
With the conflict in the Gulf continuing longer than expected — remember, in March, President Trump told The New York Times that the war would last “four to five weeks”– energy prices remain high by historical standards. As a result, inflation’s picking up again and many economists are now predicting four quarter-point UK interest rate rises before the middle of 2027.
While this might help the bank increase its net interest margin it could also lead to more loan defaults. Moreover, an economic slowdown wouldn’t been good for business. In fact, the bank’s dividend could come under threat.
And then there’s a potential windfall tax on Britain’s banks. There are rumours that the chancellor’s looking at imposing an additional levy to try and raise some extra money. In another potential blow, others are arguing for the Bank of England to stop paying interest on commercial bank deposits.
Although Lloyds is unlikely to be materially affected by either of these, it could lead to a loss of confidence in the sector, and a fall in its share price as investors seek a better return elsewhere.
My view
To be honest, I’m not too concerned about the sustainability of the bank’s dividend. Just look how much money it’s spent buying back its own shares over the past few years:
- 2021: £2bn
- 2022: £2bn
- 2023: £2bn
- 2024: £1.7bn
- 2025: £1.75bn (in progress)
- 2026: £1bn (in progress)
I’m confident the bank would cease its share buyback programme before cutting its dividend. Of course, there are no guarantees when it comes to shareholder returns. But I’m not convinced that its shares are 13.5% undervalued. Lloyds already has the highest price-to-earnings ratio of the FTSE 100’s five banks.
That’s why I find it fascinating that the City seemingly has a very different view on Lloyds than I do. In fact, only two of the 20 analysts covering the stock are recommending their clients to Sell.
Yes, the bank’s dividend is impressive but higher yields are available elsewhere, including in the same sector. I can see why the stock might appeal to some – Lloyds is a household name, it has a strong balance sheet, and an enviable dividend track record – but I believe there are plenty of better opportunities to consider elsewhere.
Should you invest £5,000 in Lloyds Banking Group Plc right now?
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James Beard does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
