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It’s been a good 12 months for shareholders Lloyds (LSE: LLOY). In the past 12 months, Lloyds shares have risen by 65%. During that same period, earnings per share grew by 11% and ordinary dividends per share increased by 15%.
It is clear that the City has been active in the matter of investment. After trading for pennies for more than a decade, Lloyds shares have now broken the psychologically strong pound. They are up 180% in the last five years.
But did they go too fast – or could there be more fuel in the tank?
Continuous business growth opportunities
Although Lloyds shares have closed over the past five years, that reflects a much improved business performance.
Last year, for example, profit after tax came in at £4.8bn. The equivalent figure for 2020, five years ago, was much lower at £1.4bn.
That was largely offset by pandemic provisions, but even last year’s unaffected figure (2019) of £3.0bn was significantly lower than the previous year’s performance.
That helps explain why Lloyds shares have done so well.
Profit after tax has more than tripled in five years. Against that, the five-year stock price growth of 180% – which is less than three times – looks less impressive.
Where does that income growth come from?
It partly reflects Lloyds’ continued strength in lending. Being the country’s largest lender has been a boon at a time of high interest rates, while loan defaults have remained at manageable levels.
Another growth comes from Lloyds’ move to become a major residential property owner. This may help it increase its earnings distribution.
But that side line is not really separated from the core business in the sense that, if the building crash was to hurt Lloyds’ core banking business, it could also mean bad news for the value of its property portfolio, even if tenants continue to pay rent. That is a risk that makes me uncomfortable.
Time to shop?
Nevertheless, Lloyds was undoubtedly doing well.
However, at 15 times earnings, has the share price recovered before it?
Not only that the price-to-earnings (P/E) ratio is higher than other competitors like Natwest (which sits at a P/E ratio of 9), and I have some concerns about another common valuation metric for bank stocks.
Lloyds’ current price-to-book ratio of around 1.3 means that the stock is trading at more than book value.
Such valuations may suggest that the share is now overvalued and the rally of recent years overdone.
At best, it can be interpreted as a vote of confidence by the market that Lloyds has the potential for continued growth. As I said above, I think that would be true.
However, that share price and rating makes me uncomfortable. Given its large loan book, any downturn in the property market is a major risk for Lloyds especially if it increases its lending significantly. The current outlook for the UK economy is not particularly strong, so I see this as a concern for long-term investors like myself.
Without a much greater margin of safety than the current price offers me, I am not willing to buy Lloyds shares yet.
