Lloyds (LLOY:LON) shares haven’t been a great investment in recent years. Over the last five years, the bank’s share price has only risen about 5%. What about the next five years, though? Do the shares have the potential to generate big gains for investors or are they likely to continue underperforming?
The long-term forecast for Lloyds shares
It’s hard to make long-term share price forecasts for a bank stock like Lloyds. There are few reasons why.
One is that banking is a ‘cyclical’ industry, meaning that it has its ups and downs. Given this cyclicality, banks’ earnings can be volatile.
Another reason is that banks tend to have complex balance sheets. You never really know what’s on their books (and could potentially blow up).
A third issue is regulation. Banking is a highly regulated industry, and banks tend to get fined by financial regulators frequently (which hurts their profits).
As a result of these issues, it’s difficult to project future earnings per share for Lloyds. Given that earnings tend to drive a company’s share price, it’s hard to make long-term forecasts for the share price.
Key factors for the next five years
The way I see it, where Lloyds’ share price will be in five years will depend on a number of factors.
Lloyds is Britain’s largest mortgage lender. So, one key factor will be the state of the UK economy and the housing market. If the UK economy is strong over the next five years, and the housing market is buoyant, Lloyds’ share price could potentially do well. On the other hand, if the UK falls into a recession (and people default on their loans), Lloyds shares could underperform.
It’s worth noting here that most economists do not expect the UK economy to be very strong in the years ahead. Currently, the International Monetary Fund (IMF) forecasts GDP growth of 1.6% this year and 1.5% next year. Meanwhile, the Office for Budget Responsibility (OBR) projects that growth will hover between 1.5% and 2.0% between now and 2029. This sluggish growth could hamper Lloyds’ profits and share price.
Interest rates are also likely to impact Lloyds’ share price. This variable is rather complex, however. On one hand, if rates were to fall, Lloyds’ earnings could suffer since higher rates are generally better for banks. On the other hand, lower rates could increase demand for dividend stocks (Lloyds shares currently offer a yield of around 5.3%).
Speaking of dividends, growth in the payout is another factor that could influence the share price over the next five years. If Lloyds was to hike its payout significantly, the stock could see more interest from investors and a higher share price. Alternatively, if Lloyds was to do some big share buybacks, the share price could rise. Over time, buybacks tend to push up earnings per share.
Another major factor for Lloyds shares will be sentiment towards UK shares. In recent years, this has been quite weak. If it was to pick up, Lloyds shares could potentially get a higher valuation. Today, the bank’s price-to-earnings (P/E) ratio is just nine so there is scope for a higher multiple.
Of course, regulation could also have an impact on the share price over the next five years. Currently, there’s some uncertainty surrounding Lloyds shares given the Financial Conduct Authority’s (FCA) investigation into motor finance mis-selling. At this stage, we don’t know how Lloyds will be affected. Analysts at RBC, however, believe that Lloyds could potentially be looking at liabilities of nearly £4 billion.
Finally, it’s worth touching on FinTech disruption. Today, FinTech companies are disrupting the banking industry at an alarming speed and capturing substantial market share from traditional banks like Lloyds. Over the next five years, this trend is likely to continue. This disruption could potentially have a big impact on Lloyds’ profits and share price.
My prediction for Lloyds shares
Ultimately, there’s a lot to think about when considering where Lloyds shares could go over the next five years. There are many different variables here, so it’s hard to make an accurate share price forecast.
Personally, I wouldn’t be surprised if Lloyds shares are not much higher in five years’ time. Given the outlook for the UK economy and the level of disruption in banking, I suspect this stock may struggle over the next five years.
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Based in London, Edward is a distinguished investment writer with an extensive client portfolio comprising a diverse array of prominent financial services firms across the globe. With over 15 years of hands-on experience in private wealth management and institutional asset management, both in the UK and Australia, he possesses a profound understanding of the finance industry.
Before establishing himself as a writer, Edward earned a Commerce degree from the prestigious University of Melbourne. Complementing his academic background, he holds the esteemed Investment Management Certificate (IMC) and is a proud holder of the Chartered Financial Analyst (CFA) qualification.
Widely recognized as a sought-after investment expert, Edward’s insightful perspectives and analyses have been featured on sites such as BlackRock, Credit Suisse, WisdomTree, Motley Fool, eToro, and CMC Markets, among others.
You can contact Ed at edward@goodmoneyguide.com