The share price of UK-focused bank Lloyds Banking Group (LSE: LLOY) is currently just 11% of its former value. In other words, it’s seen a staggering drop of 89% over the years. Anyone who had a £10,000 stake invested in Lloyds shares would now hold only £1,100 worth of its stock.
A useful lesson on the importance of diversifying into multiple stocks aside, a drop this dramatic presents an opportunity, I feel. A £10,000 stake invested now would lead to returns of £90,900 if the share price was to get back to its former price. Do I think it can do this? Let’s find out.
What happened to the share price?
The share price reached its peak in the late 1990s. The 2000s were a tough decade for the company culminating in the Great Financial Crisis.
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Lloyds went through a painful period that resulted in a government bailout, and one of the outcomes was the total number of shares rose from 6bn to 71bn. This explains, for the most part, why the share price dropped so precipitously.
And this stock dilution is exactly why it’s very unlikely we’ll see a return to its all-time highs any time soon, especially in a saturated market like banking. But I still see reasons to be bullish in the short term.
Impressive financials
While full-year 2022 results are expected next month, the nine months to September showed a year-on-year increase in net income from £11.6bn to £13bn. And the company trades at a low price-to-earnings ratio of just over 9.
A dividend yield of 4.2% in 2021 is expected to increase slightly when final 2022 results come in. And talk of a share buyback could be good news for shareholders too.
Higher interest rates are a strong tailwind for the company. The Bank of England has already announced rates will hit 3.5% next month, and further increases to curb inflation aren’t out of the question either. Higher rates are a boon for banks that can offer savings accounts of 0.5-2.5% and pocket the rest.
So does all this make Lloyds a buy for me right now?
The big problem
My biggest issue with Lloyds is its long-term prospects. I find it hard to see any bank as a reliable investment these days. The 2008 recession – partly caused by certain banking practices – left a sour taste in my mouth.
The emergence of agile fintechs, like Starling and Monzo, that offer retail services might be a problem for the banks too.
With the wider stock market correction last year, I see so many great long-term options that look undervalued elsewhere. As it is, I won’t be opening a position in Lloyds any time soon.
