Could I double my money by buying shares in Lloyds Banking Group (LSE: LLOY) today? Lloyds’ share price has fallen nearly 20% since the start of the pandemic and now looks cheap to me, trading on seven times forecast earnings with a dividend yield of 5%.
Although there are some good reasons to be nervous at the moment, I may buy this FTSE 100 stalwart for my dividend portfolio. Here’s why.
A return to growth?
Interest rates are finally starting to rise after more than 10 years at record low levels. Higher interest rates are generally good for banks, as they increase the profitability of lending. And as the UK’s largest mortgage lender, I think Lloyds should be a big winner from higher interest rates.
However, Lloyds isn’t relying on interest rates alone. The bank is also targeting growth in areas such as wealth management and insurance, which generate fee income. Lloyds says its average customer has seven financial products, but only holds 2.4 with Lloyds. So I can see plenty of room for improvement.
The main risk I can see right now is that surging inflation could trigger a recession. That would probably lead to a slowdown in new lending, and perhaps an increase in bad debts.
Lloyds share price: secure footing
Lloyds’ latest financial guidance suggests to me that the bank’s risk managers are not yet too worried. Currently, Lloyds only expects to see a small increase in bad debt between 2024 and 2026.
Revenue growth is expected to continue throughout this period. The bank expects to see additional revenue of £700m a year by 2024 and £1,500m a year by 2026.
Profitability is also expected to improve. With the bank on a secure footing, new chief executive Charlie Nunn now plans to reduce the amount of surplus capital held by the bank. My sums suggest this could support inflation-beating dividend growth and more big share buybacks.
Can I double my money?
As I write, the Lloyds share price is 46p. To double my money, I’d need to see dividends and share price gains totalling a further 46p. Is this possible?
I think it might be. At 46p, Lloyds shares are trading at a 20% discount to their net asset value of 57p per share. That means buyers are getting 57p of assets (such as mortgages) for just 46p of cash.
With the bank’s performance improving, I think we could see Lloyds shares start to trade in line with their book value. That could lift the share price by around 25% from current levels.
However, share price gains are hard to predict. I prefer to focus on dividends, as these are usually easier to forecast.
Based on the latest broker forecasts and company guidance, I estimate that Lloyds could pay dividends totalling around 14p over the next five years. That would give me a return of 30% on the current share piece.
Over longer periods, Lloyds’ dividend could continue to rise, assuming the bank avoids further setbacks. If I’m patient, I could double my money with dividends alone. I’ve achieved this with other stocks, so I know it’s possible.
There are no guarantees. But I think there’s a chance that, over the long term, I could double my money on Lloyds shares.
