Currently, Lloyds (LSE:LLOY) shares are trading for 43.5p. But when the pandemic hit, and the UK went into lockdown, share in the UK’s largest mortgage lender plummeted.
On 20 March 2020 — the end of the week in which then-prime minister Boris Johnson announced restrictions on social contact — the Lloyds share price was 31.1p.
So, if I had invested £1,000 in Lloyds on that day, today I’d have £1,355, plus around £150 in dividends. That’s because the stock has risen 35.5% since then.
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Of course, the stock has been lower and higher since then too. The shares continued to fall in 2020 when new Covid variants emerged and as we started to learn more economic impact of the virus.
Risks overplayed
Lloyds has recovered since the pandemic, but there have been more headwinds since then.
Currently, investors have shied away from the stock amid concerns about the impact of higher interest rates on potential customer defaults.
However, brokers and analysts largely see these risks as being overplayed. And that’s reflected in an average target price of 60p.
On 28 November, Morgan Stanley upgraded its position on Lloyds with a target price of 64p.
In its best-case scenario, Morgan Stanley see the high street lender reaching 85p. That’s dependent on a more resilient economy and a return on tangible equity of 14% in the 2024 financial year.
I actually believe this best-case scenario is very achievable.
Morgan Stanley’s “overweight” position underscores the benefits of a well-established loan book and a market share in excess of 20%, providing a buffer against pricing pressures.
It’s worth noting that the average Lloyds mortgage customer has an income of £75,000 — offering some insulation from the cost-of-living crisis.
Conversely, the bearish view, with a target of 40p, anticipates a scenario where interest rates decline more than expected, resulting in Lloyds yielding a considerably lower return on tangible equity at 8%.
Attractive valuation
Valuation metrics are central to any investment hypothesis.
And Lloyds has some of the most attractive metrics on the FTSE 100. The lender has a price-to-earnings ratio of 4.5 times on a trailing 12 months basis and 6.1 times on a forward basis.
In itself, that’s pretty attractive. But Lloyds looks even more attractive with its forward price/earnings-to-growth (PEG) ratio of 0.5.
This is a financial metric that combines the P/E ratio with a company’s expected earnings growth rate.
It provides investors with a more comprehensive assessment of a stock’s valuation relative to its potential for future earnings growth.
A PEG ratio below one is generally considered favourable, indicating that the stock may be undervalued in relation to its growth potential.
In the case of Lloyds, the PEG ratio of 0.5 suggests an appealing valuation. For me, this makes it a compelling investment opportunity.
Lloyds is a major holding of mine, and one I’m frequently topping up.
