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If an investor had put £10,000 into Lloyds (LSE: LLOY) shares at the start of this year, they’d be justified in breaking out the bubbly.
The FTSE 100 bank has bounced back nicely after being outgunned by rivals Barclays and NatWest last year.
A key factor in its underperformance was the motor finance mis-selling scandal. Lloyds is far more exposed than Barclays and NatWest via its Black Horse car loans division. The board set aside £450m for potential impairments. Some analysts reckon it could be on the hook for billions.
In its full-year 2024 results, published on 20 February, the board set aside an extra £700m to cover potential claims. That lifted the total to £1.15bn, which Lloyds called its “best estimate”.
This FTSE 100 bank is bouncing
Investors now await a Court of Appeal hearing in April about the scope of a review into the scandal. This could drag on for months or years. Yet investors decided not to panic. Why?
They were too busy celebrating the board’s bumper £1.7bn share buyback. If that was designed to show investors that Lloyds could afford to lose a billion or two in compensation, it worked. The dividend was hiked by 15%.
This also put a positive gloss on a 20% drop in pre-tax profits from £7.5bn to £5.97bn. In another disappointment, net interest margins, the difference between what Lloyds pays savers and charges borrowers, fell 16 basis points to 2.95%.
Sometimes I really don’t understand the stock market. On another day, Lloyds could’ve taken a beating. Instead, the shares are flying. Over the last 12 months, Lloyds shares have surged 46%. That’s good, but over the same time scale Barclays has rocketed 87% with NatWest up a staggering 93%.
Still, £10k invested in Lloyds at the start of the year would now be worth £12,100. The investor won’t have received any dividends yet, but they’ll get a payout on 20 May.
Dividends are on the way
Even after this rally, Lloyds shares still don’t look too expensive. They trade at a price-to-earnings (P/E) of 10.7, comfortably below the blue-chip average of around 15 times.
I’m a little concerned by the price-to-book ratio. When I bought the shares a couple of years ago, it was down to 0.4. Last year, it was around 0.6, then 0.8. Today, it’s up to 0.9. The shares are starting to look fully valued.
When I look at the income, I stop worrying. The trailing dividend yield stands at 4.75%, but analysts expect this to rise to 5.01% in 2025 and 5.73% in 2026.
If interest rates fall later this year, that could boost consumer lending (but may squeeze margins further). The motor finance scandal could drag on, as could the general downturn and cost-of-living crisis.
The 18 analysts offering one-year share price forecasts have produced a median target of just under 69p. If correct, that’s an increase of just 2.8% from today. The easy gains may have been made.
I still think the shares are well worth considering for an investor who wants long-term exposure to a FTSE 100 bank. I’m holding mine, with luck, for decades. But in the shorter run, I expect them to slow from here.
