Lloyds (LLOY:LON) shares have struggled to generate any real momentum in recent years. Currently, they are trading for around 42p, more than 30% below the level they were trading at five years ago.
Will Lloyds shares ever hit £1 again? Possibly. However, for Lloyds’ share price to rise to the £1 level, a number of things will have to happen first, in my view.
Lloyds needs a strong UK economy and housing market
For Lloyds shares to hit £1, we will need to see the UK economy strengthen.
As a UK-focused bank, Lloyds is essentially a proxy for the UK economy. This means that when the economy is strong, its profits and share price tend to rise, while when the economy is weak, its profits and share price tend to fall.
Now, right now, the UK economy is not in a position of strength. While the International Monetary Fund (IMF) expects the UK to avoid a recession this year, it anticipates UK GDP growth of just 0.4% for 2023. That represents the second-lowest growth forecast across the G7. This isn’t great news for Lloyds.
Source: City A.M. and IMF
We will also need to see the UK housing market strengthen. Lloyds is the UK’s largest lender, so it is very exposed to the UK mortgage market. Currently, more than half of its loans are mortgages. The issue here is that the recent spike in interest rates is putting pressure on a lot of borrowers. As a result, Lloyds could be about to see a surge in loan defaults. In the first quarter of 2023, the bank registered an impairment charge of £246 million, up from £178 million a year earlier. Given that UK interest rates are still rising, I expect loan impairments to get worse before they get better, hitting profits.
If conditions in the economy and housing market were to improve at some stage in the future, however, I’d expect Lloyds’ profits to rise. Higher profits would most likely boost the bank’s share price.
To reach the £1 mark though, sentiment towards UK shares would probably need to improve.
In recent years, UK stocks have been out of favour with international investors for a number of reasons including Brexit uncertainty, political turbulence, the weak economy, and the composition of the UK market. This has kept valuations depressed and led to underperformance for the FTSE 100 index.
If sentiment was to improve, valuations could rise, and Lloyds’ share price could get a boost. There is certainly scope for a re-rating in the valuation here. At present, Lloyds trades on a forward-looking price-to-earnings (P/E) ratio of just 5.5. That’s a very low valuation.
Dividends could also have an impact on Lloyds’ share price in the years ahead and determine whether it is able to hit £1.
While Lloyds shares currently sport an attractive dividend yield of around 5.7%, payouts have fluctuated in recent years. For example, the full-year payout for 2022 was 2.4p per share versus 3.21p per share in 2018. Inconsistent dividend payments can be a turn-off for a lot of investors, particularly those seeking regular income.
If Lloyds was to continue increasing its payout from here, and prove that it is a reliable dividend payer, the stock could become more appealing to income investors. Higher demand for the stock could push its share price up.
Lloyds needs to become more digital
Finally, for Lloyds’ share price to hit £1, the company needs to show that it can fend off new competition.
Right now, traditional banks like Lloyds are facing intense competition from FinTech companies such as Revolut, Monzo, Wise, and Apple, which are disrupting the banking industry at a rapid rate and capturing market share.
Lloyds needs to continue innovating and show investors that it can compete in today’s digital world.
Is £1 on the horizon?
Putting this all together, Lloyds shares are unlikely to hit £1 any time soon, in my view.
However, I would not rule out a return to £1 at some stage in the future. If the UK economy was to strengthen, and Lloyds’ profits and dividends were to rise, £1 could be achievable
