Lloyds (LSE: LLOY) shares have pushed back above £1, a psychological pressure point it has struggled to decisively break through since 2008.
Many investors will worry that the bank will again struggle to sustain a move much further beyond this long‑standing barrier.
But looking at its strong profit forecasts, capital strength, and rising shareholder returns, I think there is room to go much higher.
So, how high is that exactly?
What’s fair value here?
‘Fair value’ is the true worth of any share, which reflects the long-term fundamentals of the underlying business. It is very different to ‘price’, which is the short-term figure buyers and sellers agree to deal on at any given time.
The difference between these two measures is key in long-term investors’ ability to produce outsized profits. This is because historically share price trend to their fair value over time.
In my experience as a senior investment bank trader, discounted cash flow (DCF) analysis is the best way of determining fair value. It does this by taking long-term cash flow projections for the underlying business and discounting them back to today. That produces a per-share current value.
Analysts’ estimates for the discount to be applied can vary, which can lead to differing DCF outcomes sometimes. But my DCF analysis — including an 8.4% discount rate — shows Lloyds shares could be 47% undervalued at their current £1.11 price.
That suggests a fair value of £2.09 — nearly double where they are now.
If the historical trend for share prices converging to their fair value continues, this represents a terrific potential buying opportunity today, if that DCF modelling holds good.
While-u-wait
In the interim convergence period, investors could expect to receive rising dividend payments. Forecasts are that the current 3.5% dividend yield will increase to 4.1% this year, 4.8% next year, and 5.6% in 2028.
So, a £20,000 holding on the forecast 5.6% as an average would make £14,968 in dividends over 10 years and £86,893 after 30 years. This also assumes the payouts are reinvested back into the shares to harness the full supercharging power of dividend compounding. And dividends can fall as well as rise over time, of course.
Nevertheless, at that point, the holding’s total value would be £100,893, which would pay an annual income of £5,650!
My investment view
I already have holdings in two other banks — HSBC and NatWest. Owning another would disturb the risk/reward balance of my portfolio. However, Lloyds is now on my watchlist to buy if either of these start to underperform.
I think strong profit growth will power major gains in its share price long term. And I think it will support sustained increases in dividends, generating significant second income.
A risk to its profits is a sharper‑than‑expected downturn in the UK economy, which could lift loan impairments. Another is any tightening of regulatory capital requirements that might limit the pace of dividend increases.
Nonetheless, analysts forecast Lloyds’ profits will grow by a very robust 10.1% a year over the medium term at least.
Its latest results — Q1 2026 — saw profit before tax soar 33% year on year to £2bn. And management also restated its return on tangible equity target — a key profit marker for banks — of over 16% for the full year.
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Simon Watkins owns shares in HSBC and NatWest.
