Knowing my luck, if I invest £10k in Lloyds Banking Group (LSE: LLOY) shares now, they’ll go nowhere. Or worse.
At least, that’s been my experience with them so far.
But the FTSE 100 banks have faced crisis after crisis, and crises just can’t go on forever. Can they?
We can’t really predict share prices. The best we can do is buy when we think they’re too low and hope things will change.
The future?
But we can take a look at the things we think could boost our holdings, and try to estimate what difference they might make.
I mean, there’s no point just staring glumly at our fallen shares. So let’s at least generate some optimism, shall we?
These are just a few ‘What if?’ scenarios, just to cheer me up a bit.
Upwards correction
Broker forecasts put Lloyds stock on a price-to-earnings (P/E) ratio of only about 5.5 by 2025. I think that’s too low.
In October, the average P/E for the FTSE 100 stood at 15.3. At least, that’s one estimate — it depends who we ask.
If the Lloyds valuation rose to equal that, it would suggest a rise of about 2.8 times. And that would turn £10k in the stock today into £28k.
Banks will probably deserve a lower P/E for some time, mind. But if it can reach a P/E multiple of 10, that would be enough to get us to £18k.
Earnings growth
In another scenario, there’s forecast earnings growth on the cards for the next few years. If the average annual rate continues for five years, we could see Lloyds’ earnings growing 14% in five years.
So, if the P/E stays the same, that would suggest a 14% share price rise too.
And that would take £10k invested today up to £11.4k.
That might not be the kind of money that retirement dreams are made of. But in addition to other possible share price drivers, it could be a nice extra boost.
Reinvest dividends
Now, what if the valuation stays the same, but the dividend keeps going and I buy more shares with the cash each year?
Right now, we’re looking at a forecast dividend yield of 6%.
That could turn an intitial £10k into about £13.4k in five years. That’s not a multi-bagger, by a long way.
But it’s a decent return, and way more than I’d be likely to get from a Cash ISA. It’s not guaranteed, like a Cash ISA, of course.
All three?
If all three things shoud happen — a P/E revaluation, earnings rises, and progressive dividends?
Well, it would depend on the degree of each. But for me, this all strenghtens my thought that Lloyds shares are too cheap.
Still, the next five years might be like the past five. And I do see a real chance of that, especially with all this ‘higher for longer’ interest rate talk.
But if all I get is the dividends, I’ll be happy. I might even come back in five years and let you know how things go.
