Lloyds (LSE: LLOY) has made an impressive recovery over the past six years, but the bank’s share price is still languishing around 87% below its pre-crisis high of 590p.
And despite the progress made over the past few years, Lloyds still has a long way to go before its shares can make another run at 600p.
A different bank
Lloyds’ shares initially rallied to a high of 590p back at the beginning of 2007, after the bank reported its results for 2006.
For full-year 2006, Lloyds reported a profit before tax of £4.5bn and earnings per share of 49.9p. Return on equity — a key measure of bank profitability — came in at 25.1% for the year.
Today, Lloyds is a very different bank compared to what it was back in 2007. For a start, today Lloyds’ asset base is nearly three times larger than it was in 2007. At the end of 2014, Lloyds reported total assets of £855bn compared to £344bn as reported at the end of 2006.
What’s more, Lloyds’ cost income ratio is 51% today, compared to the 47% as reported nearly 10 years ago. Then there’s Lloyds’ share count to consider.
Rescue package
Between year-end 2006 and year-end 2014, Lloyds’ share count has risen more than ten-fold. In particular, at the end of 2006 the bank had 5.6bn shares in issue, by 2014 this figure had increased to 71.4bn.
Unfortunately, this will make it tough for the bank’s earnings per share to return to 49.9p, the level reached before Lloyds’ shares rallied to 590p.
As earnings per share is generally considered to be the single most important variable in determining a share’s price, Lloyds will either have to drastically reduce its share count, or profitability to drive earnings per share back above 40p, which would justify a return to 590p. City analysts expect the bank to report earnings per share of 8.6 for full-year 2015.
Lloyds has the assets to do this and the bank’s return on equity is gradually improving. Management is targeting a return on equity of 13.5% to 15% by 2017 and City analysts believe that Lloyds could return £20bn to £25bn to shareholders over the next three years. This cash return could come in the form of both share buybacks and dividends. Buybacks would help reduce the number of Lloyds’ shares outstanding, pushing up earnings per share and Lloyds’ share price would follow suit.
The bottom line
So can Lloyds’ shares recover to their pre-crisis high? Well, the bank has the tools at its disposal to push profits back to their pre-crisis peak. Although, until the bank reduces its share count, earnings per share will remain stubbornly depressed.
Still, Lloyds is planning to return excess capital to investors over the next few years, which could mean that a share buyback is on the cards. This would reduce the number of shares outstanding and push earnings per share higher. Nevertheless, it will take many years to reduce the number of Lloyds’ outstanding shares back down to 5.6bn.
