With its huge bank network and b 33bn market capitalization, it may be easy to forget Lloyds (LSE: LLOY) actually trades as a penny stock. This is by far the most valuable UK penny stock. But it does not deviate from the fact that the price of Lloyds shares is significantly lower than that of its peers.
That relatively poor performance may still change. The bank’s share has been 66% in the last one year. Below I consider whether they can top 60p next year, which requires an increase of about 30% from today’s price.
Lloyds is a positive driver for the share price
While next year may see a less challenging increase of 30% compared to shares managed over the past 12 months, it simply won’t happen for any reason.
But I see some potential drivers for raising the price of Lloyds shares to 60p. One of these is the continued resilience of the UK economy. The bank is the largest mortgage lender in the country. This means that any change in the economy could affect the bank’s business results. Early in the epidemic, Lloyds made large provisions against potential defaulters. Fortunately it was later able to release most of them, which boosted confidence in the quality of his mortgage books. As the UK economy and housing market continue to perform well, that could improve investor confidence in Lloyds ’outlook.
The recovery in bank dividends this year has led to an improvement in investment, but I think the news of better dividends could come. After all, the dividend was below where it stood last year before it was suspended. But in the meantime the bank’s CET1 ratio has improved. In common parlance, this means that it now sits in a large pile of surplus cash, which it can use to raise dividends.
Why I think Lloyds share price could hit 60p
Could that bull case already be reflected in the share price? After all, it has increased by two-thirds in one year.
The reason I think prices could rise further is that the current valuation still seems cheap to me. In its first half, Lloyds reported earnings per share of 5.1p. For that half, the price-to-income ratio is close to 9, even if the second half doesn’t bring in extra profit. Although the second half may be weaker than the first half, hopefully it will still earn positive. In that case the price-to-earnings ratio will be less than.
Risk with Lloyds shares
But Lloyds share price has not been at 60p since the beginning of last year. Seeing the economic long tail of the epidemic, could it get back there?
Although the economy is strong, there are risks. For example, a bank’s move to own land can distract management time from the challenge of keeping the bank competitive. Increasing competition from Fintech could also put a profit margin on big banks like Lloyds. Nonetheless, I think we can toast the 60p Lloyds share price before the end of next year.
Christopher Ruan owns shares in Lloyds Banking Group. Motley Full UK has recommended Lloyds Banking Group. Opinions expressed in the companies mentioned in this article may differ from those of the author and therefore our official recommendation in our subscription services such as Share Advisor, Hidden Winner and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.