I’d be happy for the Lloyds Banking Group (LSE: LLOY) share price to get back to what I paid when I first bought some.
I mean, it’s been a poor performer for years now. And the recovery from the 2022 crash has gone off the boil.
But that must surely give people buying today a better chance of growing their money five-fold, mustn’t it?
What needs to change
For some stocks, it can be hard to come up with any kind of valuation. That’s especially true for growth stocks, particularly if they haven’t reached profits yet.
Analysts use various measures related to sales, values of assets, and all sorts of things. But until we see sustained profit, those can all be thrown off course.
But, we don’t have that problem with Lloyds. The banks does make a profit, and we do have measures related to earnings.
And that brings me to the first thing that would need to change. I’m talking about valuation. And valuing bank shares is not easy now.
Forecasts put Lloyds shares on a price-to-earnings (P/E) ratio of 5.8. I think that’s way too low, with the long-term FTSE 100 average up around 15.
But the big question is, what’s a fair P/E valuation for a bank? In the past, banks scored highly. But the financial crisis tore down any illusion of infallibility. Banks, it turned out, were not the safest things on the planet.
Against that, new regulations mean bank balance sheets have to be kept a lot stronger now. But the investing world has not yet adjusted to where bank valuations should be.
Maybe a bit below the Footsie average? Maybe around 12? That kind of revaluation could double the Lloyds share price.
Then we come to dividend yields, and we’re looking at a forecast 6% from Lloyds. That’s above the index average of 3.9%. So the Lloyds share price would need to rise about 50% to bring its yield down to the average.
Combined, the P/E and dividend yield suggests a revaluation might lift Lloyds shares by about 50%-100%.
I’d be happy with that. But to get to five times the gains, we’re going to need some serious earnings growth.
We don’t actually have a lot of growth on the cards right now. So I’ll have to turn to speculation.
Let’s suppose Lloyds can grow its earnings by 5% per year, and the P/E stays at today’s low level of 5.8. My spreadsheet suggests it should take about 33 years for the Lloyds share price to multiply five times, at that rate.
That’s without any change in valuation, though.
If we expect the P/E to rise between 50% and 100%, that would suggest somewhere between 19 and 25 years to five-bag.
That would be on top of the annual dividend stream that investors would also enjoy.
What does it mean?
Now, I’m not trying to forecast anything here. I’m just trying to show what might be needed for a five-fold Lloyds share price gain.
And, despite the clear risks right now, it makes banks shares look cheap to me.
The post What would it take for the Lloyds share price to climb 5X? appeared first on The Motley Fool UK.
Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023