Shareholders in banking group Lloyds (LSE: LLOY) have enjoyed a good run lately. Over the past year, the shares have surged 49%, based on the price at the time of writing this article earlier today. Indeed, today the stock price hit a new 12-month high.
As a Lloyds shareholder, should I take advantage of this surge to lock in some profits? Or could it be a signal that I ought to buy more shares for my portfolio while they have positive momentum?
Why is the Lloyds share price booming?
There are several reasons behind the increase in the price. Top tier British banking stocks in general have had a good run lately. Over the past year, NatWest is up 55% and Barclays is up 43%, for example. So in a sense, there is nothing special about what has happened to Lloyds shares in the same period. A stronger economic recovery than expected and sustained consumer demand help explain the bounce-back of many leading banking shares.
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Lloyds has also benefited from a good business performance improving its financial firepower. The bank has restored its dividend, which was suspended in 2020. But it has not yet started to pay out at anything like pre-pandemic levels. Yet it has been highly profitable lately. That has allowed Lloyds to build up excess capital. Some investors like myself are hopeful that it may use those funds to pay bigger dividends in future.
Are Lloyds shares overvalued?
With such a strong performance over the past 12 months, I wonder whether the shares are fairly valued.
Based on the profits for the first nine months of this year, the prospective price-to-earnings ratio for the year is likely to be around six or seven. I think that is still low for a bank with the size and customer base of Lloyds. On top of that, future business could remain buoyant. The housing market has been resilient, which helps Lloyds as it is the country’s biggest mortgage lender.
There are risks though. For example, as interest rates rise, mortgage defaults could increase. That might hurt profits at the bank. The company’s venture into being a landlord looks like a distraction to me, and could land it with a lot of bad debt if property prices fall.
But overall I think the outlook remains positive, so at the current valuation, I see no reason to sell my Lloyds holding.
Future momentum
Should I, in fact, add to my position? Even after the performance over the past year, Lloyds shares still look cheap to me.
In short, I am tempted to buy more shares at the moment as I see further possible share price upside. A possible trigger for the shares to move up would be an announcement that the company plans to pay out higher dividends. Investor sentiment towards Lloyds seems positive, which is why it hit its highest price in a year today. I share that enthusiasm and am considering buying more Lloyds shares for my portfolio.
