Lloyds (LSE:LLOY) shares remain attractive to investors seeking a mix of dividends and share price growth. That’s at least my view.
But if I had started investing in the FTSE100 If I had bought a bank two years ago, I would be a very happy person today. During that time, the stock has risen 26.2% from around 44.91 pence per share.
This means that a £1,000 investment two years ago would be worth £1,262 today. In addition, I would have received around £120 in dividends over that period.
So my total return would be almost 40%. That’s an incredible return.
Can Lloyds continue to be profitable for investors?
The forecasts for Lloyds are extremely positive and therefore the share price has risen sharply in recent months.
Even though 2024 is unlikely to be the best year for the company, things could improve in the medium term.
Earnings per share (EPS) – the all-important measure of profit – are expected to rise from 5.9 pence per share in 2024 to 6.9 pence in 2025 and 8.3 pence in 2026.
Play it safe
One of the reasons for this is the discontinuation of Lloyds’ hedging practices. Banks engage in hedging to reduce their exposure to interest rate fluctuations.
There are many ways to look at this, but essentially it is about the strategic use of financial instruments to avoid sudden fluctuations in interest rate-related returns.
The best way to think about this is to think about government bonds. Banks buy a lot of government bonds, and some of these bonds from, say, five years ago have low yields.
But the bonds they are buying today have a much higher yield, pushing up banks’ net interest margins and extending the momentum of higher yields over the medium term.
Analysts even estimate that Lloyds’ net income from hedging could exceed £5 billion by 2025.
Brokers remain positive
The performance of Lloyds shares was not particularly good at the beginning of August. One reason for this was changes in analysts’ forecasts for the bank.
City downgraded Lloyds to neutral, noting that it was the only major UK bank to miss earnings forecasts before provisions. RBC Capital Markets Lloyds upgraded its rating from “outperform” to ‘sector performance” after hitting the 60 pence target.
Analysts remain mostly positive on Lloyds even after the stock soared. There are currently four buy recommendations, four outperform recommendations, nine hold recommendations and just one sell recommendation.
The average price target is currently 62 pence, which means the stock is at a discount of 8.2%.
The conclusion
Lloyds is a dynamic company, but as with any investment, there are risks. The company has set aside £450 million to cover a potential fine for car finance, but that may not be enough. We may not know how much the fine will be until next year.
Likewise, the economy needs moderate interest rates and Lloyds is often seen as an indicator of the UK economy. Some shocks to the consumer price index or the labour market, or even just the return of Donald Trump to the White House, could delay further rate cuts.
But back to the positive.
Earnings are growing and the bank trades at a significant discount to its international peers, particularly to medium-term earnings expectations. Combined with a dividend yield of 4.7%, it is an important part of my portfolio.
If I wasn’t already heavily invested in UK banks, I would buy more.
The post If I Invested £1,000 in Lloyds Shares Two Years Ago, Here’s What I’d Have Today appeared first on The Motley Fool UK.
Further reading
James Fox holds positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. The views expressed on companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
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