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The Lloyds Banking Group (LSE: LLOY) share price has been on a tear, rising more than 37% over the last year and a thrilling 132% over five years. While that’s impressive, it’s not quite best in class. FTSE 100 rival NatWest has surged 60% and 300% over the same respective periods, amid a wider banking sector revival.
Lloyds hasn’t been able to shake off the cloud of uncertainty cast by the Competition and Mergers Authority (CMA) review into motor finance commission mis-selling, prompting fears it could be hit with a multi-billion-pound compensation bill. FTSE 100 rivals aren’t as exposed.
FTSE 100 dividend hero
Still, investors have been rewarded. The share price surge has shrunk the trailing dividend yield, but it remains a tempting 4.14%. The board’s progressive, having hiked the 2024 dividend by almost 15% to 3.17p a share.
Analysts expect it to hit 3.64p this year (another near-15% hike), and continue in that vein lifting the dividend to 4.18p in 2026 and 5.06p in 2027. That final number equates to a 6.6% yield at today’s share price of 76.5p. Tempting, if achieved.
Lloyds has also been shrinking its share count to lift returns. Last year it repurchased £2bn of shares. A fresh £1.7bn share buyback kicked off on 21 February.
The bank reported full-year results on 20 February. There was some bad news too. Pre-tax profit dropped 20.4% to £5.97bn, short of expectations. The net interest margin dipped to 2.95%. Higher interest rates and softer mortgage demand were key culprits.
Lloyds also added another £700m to its provision for motor finance claims, taking the total to £1.15bn. However, the board’s decision to greenlight a generous dividend hike and share buyback suggests confidence. Investors were happy.
Bumpy growth
Q1 numbers, published on 1 May, showed pre-tax profit fall 7% to £1.53bn, but income up 4% to £4.4bn. Impairment charges shot from £57m to £309m, with a £100m adjustment made to reflect risks from fresh US tariffs.
It’s no surprise that analysts think the pace will slow. The 16 tracking the stock have pencilled in a median 12-month share price target of 83.5p. If correct, that’s a gain of just under 9.5%. Add the forecast yield of around 4.5%, and total returns could touch 14%. That would turn £10,000 into roughly £11,400. Decent, but hardly fireworks.
Nobody can say how this will play out, especially with the motor claims saga still unresolved. If Lloyds escapes with minimal damage, a sharp rebound could follow. If not, that forecast return may prove optimistic.
The UK economy’s still sluggish and high interest rates are squeezing mortgage lending, which could also hit performance over the year ahead.
Lloyds shares trade at a price-to-earnings ratio of 12. That’s above HSBC, NatWest and Barclays, all of which sit just below 10. The price-to-book ratio’s more in line, at 0.96. Lloyds still looks decent value, but it’s not the bargain it once was.
I hold the stock and plan to keep it. While I expect short-term bumps, the long-term case remains intact. Investors might consider buying today, especially with a five-to-10-year view. But with the looming regulatory judgment still to come, it’s a tough call whether to buy before or after the outcome.
