The UK economy seems to be evolving. GDP is down, but some other issues are more positive. 2022 was a year of red-hot inflation, with prices up in double digits. But by October 2023, inflation had dropped to 4.7%, showing that months of high interest rates are having an effect.
This closely impacts the UK banking sector, so I’ve been keeping my eye on Lloyds (LSE:LLOY) shares for the last few months. Although they’ve been unimpressive for most of 2023, the shares have enjoyed a nice 10% climb in the last 30 days. Given this new-found momentum, could the stock climb to £1 in 2024? Let’s investigate.
Valuation and dividends
Lloyds shares currently trade on a price-to-earnings (P/E) ratio of 6.5, which seems good value to me. For context, the FTSE 100 average usually hovers around 14, and most good-value stocks tend to trade below 10. HSBC shares trade on a P/E ratio of just 5, signalling the wider sector might be undervalued.
Complementing the low valuation, the shares boast a healthy 5.3% dividend. This is over 1% higher than the Footsie average. What’s more, Lloyds raised its half-year dividend by 15% year on year, with many analysts predicting more rises could be expected in the future.
When looking at the bank’s balance sheet, it’s clearly laden with extra cash. Its CET1 capital ratio was 14.6% in September, comfortably above the requirement of 12.5%. CET1 ratios are a measure of capital that banks have to hold.
Strong performance
Lloyds’ strong performance has also allowed it to initiate a series of share buybacks. Earlier this year, it completed a £2bn repurchase, reducing the number of shares in circulation by a whopping 7%.
Buybacks are good news for investors as reducing the share count means that dividends are paid out on a smaller number of shares, therefore increasing yields. Also, they increase metrics such as earnings per share (EPS), which can lead to further share price gains.
Macro headwinds
One risk I do see for Lloyds is the fact that the UK economy is shrinking. In fact, S&P Global has forecast growth of just 0.4% for 2024. This is bad news for Lloyds.
Falling inflation and economic growth usually mean that interest rates will also fall. This is bad for Lloyds as it means that it will earn lower interest on its loans, reducing its net interest margin (NIM). The NIM is the difference between interest earned, and interest paid out to customers.
Now, it should be noted that these are just projections and hypotheticals. However, if these scenarios do come to fruition, then I struggle to see how Lloyds shares could continue to climb in 2024. Yes, the dividend is rising, but I’m not convinced this will be enough to sway investors in favour of buying the stock. For this reason, I don’t think Lloyds will reach £1 in 2024 and I won’t be buying today.
