Three years ago, I decided Lloyds (LSE: LLOY) shares looked like a no-brainer buy. What made me so confident?
First, they looked astonishingly cheap, with a price-to-earnings (P/E) ratio of just five or six. The price-to-book (P/B) ratio was a seriously modest 0.4. Better still, there was plenty of income on offer. The shares were on course to yield 5% when I bought them.
Only one thing baffled me. Despite its obvious attractions, the Lloyds share price was still bumbling along at around 46p. Why wasn’t everybody else racing to buy this stock? Had I missed something?
Can this FTSE 100 stock power higher?
Profits ultimately drive share prices, and they had been a bit bumpy. While statutory pre-tax profits hit £6.9bn in 2021, they retreated to £5.9bn in 2022. However, that mostly reflected loan impairments, cash set aside to cover potential default costs. I also noted that higher interest rates were allowing banks to widen their net interest margins, the difference between what they pay savers and charge borrowers. It’s a key profitability measure, and it was pointing the right way. So I filled my boots.
Lloyds shares have climbed an impressive 50% in the last 12 months and now trade at 111p. Personally, I’m sitting on a share price gain of 141%. But even that understates the rewards. With dividends reinvested, my total three-year return is closer to 165%, which is stunning. I never expected anything like that, but of course it begs the question: can this continue?
Perhaps this is more of an issue for new investors rather than existing ones. I have no plans to sell my Lloyds shares. I hope to hold them for years and if luck allows, for life. But it’s an issue for anyone considering buying Lloyds today.
Are investors still getting good value?
The stock is simply not as cheap as it was. Today, the trailing P/E ratio is 15.9, much higher than when I dived in. On a forward basis that falls to 11.1 for 2026, suggesting earnings may continue to rise. The P/B ratio is also higher, nudging 1.3. Lloyds is no longer the bargain it was.
For the last three years, the board has increased shareholder returns by a stunning 15% a year. Yet the yield has fallen due to all that share price growth. Lloyds shares shares are forecast to yield a more modest 3.9% this year. However, that’s expected to near 4.6% in 2027. This suggests the board will continue to hike dividends at a decent pace.
Lloyds is now almost exclusively focused on the UK, and the domestic economy is struggling. That could hit growth, especially given the weak housing market. As the costly motor finance scandal showed, banks face constant regulatory risks. Lloyds also faces a constant challenge from smaller, nimble challenger banks.
Yet with a long-term view, I still think it’s well worth considering. Investors might consider drip-feeding money in and taking advantage of any dips. They should also look at rival FTSE 100 banks. NatWest shares are cheaper today and offer a higher yield. That’s the one I’ve been buying lately.
Should you invest £5,000 in Lloyds Banking Group Plc right now?
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Harvey Jones owns shares in Lloyds and NatWest.
