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A duplication in the Lloyds Banking Group (LSE:LLOY) share price next year looks a bit far-fetched, I admit.
Even if that doesn't happen, I'd say the bank still looks like a top long-term buy just for its 6% dividend yield.
If the share price and dividend remain the same forever, I will be happy to buy more Lloyds shares each year. And I would use the dividends to buy even more shares.
everything changes
Things won't stay the same, of course. On the one hand, forecasts show dividend growth over the next two years. If they are right, the yield could approach 8% by 2026.
They estimate the 2026 price-earnings (P/E) ratio at 5.5. But what is a fair P/E bank valuation? That is a difficult question.
In times like this, I would say they should be valued lower. But that 5.5 is not much more than a third of the FTSE 100The long-term average. It must be too low, right?
Even if Lloyds' share price doubled, that 2026 P/E would still be well below the Footsie average at 11. And we'd still have a 4% dividend yield. Not long ago, that would have seemed right.
Interest rate hit
Even with that, I think interest rates will probably keep Lloyds shares low for a while yet. Hopes for an early cut in 2024 appear to have faded. I mean, Bank of England (BoE) Governor Andrew Bailey seems reluctant to even talk about it. And there is a feeling that rates could stay above 4% for a couple more years.
Lloyds, as the UK's largest mortgage lender, faces more risk of insolvency than its main rivals. Still, in the bank's fiscal 2023 statement on Feb. 22, it recorded only a modest impairment charge.
And cash flow at Lloyds also seems to be doing well at the moment. With the results, the bank also said: “Given the group's strong capital position, the board has also announced its intention to implement an ordinary share buyback program of up to £2.0 billion..”
Buyback effect
This means that future earnings and dividend cash will be spread across fewer shares. And I expect broader per-share valuation measures should push up the share price.
Well, despite a series of strong capital returns, not much has happened yet.
Lloyds' share price has been broadly stable for three years and is still down 25% in five years. But more buybacks could help fuel any potential doubling of the stock.
Can shares be duplicated?
So what is my feeling about Lloyds shares doubling now?
I doubt we'll be able to see it in the next 12 months. I think our current economic state could keep people away from bank stocks for a while yet.
But I do think that a combination of earnings and dividend growth, along with a revaluation, could push the stock in the right direction in the coming years.
