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I own Lloyds (LSE: LLOY) shares and I’m delighted I do. The FTSE 100 banking stock is up 43% over the last 12 months and almost 220% over five years. Dividends are on top of that, and they’ve grown steadily. After reinvesting mine, I’ve almost doubled my money since I started building my stake in early 2023.
But what if I didn’t own the stock? Would I still consider buying Lloyds Banking Group today?
Valuation shift
The obvious risk is that after a strong run, momentum may cool. When I bought in, the stock was cheap, trading on a price-to-earnings (P/E) ratio of about six. Its price-to-book (P/B) ratio was also low, at 0.4.
Today it’s pricier, with a P/E of 13.1 and a P/B of 1.02. That’s not extortionate, but it’s no longer a screaming bargain either. On the plus side, it suggests investors have more confidence now than when I first bought.
The dividend tells a similar story. My entry-point yield was 5.1%. Today, it’s 3.8% on a trailing basis. Lloyds costs more and pays less income than when I bought. That’s the attraction of contrarian investing: buy when others are fearful, not when a stock is in full flight. But higher potential rewards also carry higher risk. This stock pick worked well. They don’t always.
Rising pre-tax profits
Still, Lloyds looks in good shape. On 24 July, it posted a 5% rise in pre-tax profits to £3.5bn and hiked the interim dividend 15% to 1.22p per share. CEO Charlie Nunn is cutting costs, diversifying income and in a controversial move, planning to root out underperforming staff.
Yet the wider picture’s trickier. UK growth flatlined in July, the housing market’s struggling as inflation and interest rates stay high, and the upcoming Budget looms large. Think tank IPPR recently called for a windfall tax on banks. Investors won’t know if that will happen until 26 November.
I still think Lloyds looks attractive for long-term investors. Delaying until after the Budget might be tempting, but timing the market like that rarely works.
Running the numbers
So what if an investor put £10,000 in Lloyds today? At 83.74p per share, they’d get around 11,941 shares, before charges. Analysts forecast total dividends of 3.5p per share for 2025, rising to 4.07p in 2026. If correct, those 11,941 shares would deliver just over £486 next year, a forward yield of 4.86%.
Any share price growth would come on top. Consensus forecasts suggest a 12-month target of 91.8p, up 9.57% from now. That would lift the total return including dividends to 14.43%, turning that original £10,000 into £11,443 after one year.
Naturally, nothing’s guaranteed. The dividned could be cut, although that seems unlikely today. Lloyds shares could just as easily fall instead of rise. That could happen to any stock, at any time.
But investing isn’t about a single year. It’s about the long haul. And with those sums in mind, I still think Lloyds is worth considering for investors willing to tuck their money away for at least five years, and ideally longer.
