After the Lloyds share price rockets 180% in five years, is it time to sell?

With the Lloyds Banking Group (LSE: LLOY) share price up around a 10-year high, I’m facing one of my thoughest investing decisons. That’s knowing when to sell.

We’re looking at a 50% price rise so far in 2025 alone, and it means a tricky decision. When I first bought Lloyds shares I did so because I saw them as undervalued. And through the 2020 crash (and other crises prior to that) I held on for the same reason.

But every time I’ve ever bought a stock I’ve never thought about one key question. What specifically has to change to make me want to sell?

Taking profit

When a stock is in profit, a popular approach is to sell some shares and bank the cash. Skim a bit off the top while still keeping a holding. I can understand why people might do that, but it presents me with a contradiction. If the valuation still looks attractive enough to retain some shares, why wouldn’t I want to keep them all?

Reducing the risk if I have too much of a weighting to one sector is a good reason. After all, I rate diversification as an absolute must when investing in stocks and shares. But I think I’m safe enough on that score.

Selling for the purpose of taking profits would be basing a decision on history. It would be all about what price I paid for the shares back when I bought them. And looking at the value of a stock today, that’s just not relevant. The decision surely has to be about the future, and how I see potential gains based on current valuation.

Risk reduced

Part of assessing potential involves thinking about risks. And for Lloyds, one of them has eased considerably. The court ruling on the car loan mis-selling case brought a sigh of relief to many a shareholder. And Close Brothers Group investors has done even better that Lloyds — its shares are up 40% since the decision.

The Financial Conduct Authority (FCA) is still looking at a limited compensation scheme. But the worst-case outcome has been averted. And it seems likely the cash Lloyds has already set aside should be about enough to cover whatever the FCA comes up with.

Lloyds still faces an adverse interest rate environment. When rates fall further, so will lending margins. Will lending volume growth be enough to make up for margin declines? That’s a big unknown. And the economy is far from out of the woods yet — mortgage lenders could still face challenges.

Valuation

So what about that valuation? Lloyds is on a forward price-to-earnings (P/E) ratio of 12. And if that’s where it looked likely to stay, I’d probably see it as high enough and maybe search for better value alternatives. But forecasters are bullish, and see earnings growth pushing the P/E down to 7.5 by 2027.

For my money, that would be too cheap. Especially with the 4% forward dividend yield projected to rise above 5.5% by 2027 based on today’s share price. Even with banking sector risk, that valuation actually means I’m consider buying more. Lloyds is still not a Sell for me.