Ever since the big banking crash bottomed out in 2009, I’ve thought the Lloyds Banking Group (LSE: LLOY) share price was sure to soar in the next five years. It still hasn’t.
In fact, Lloyds shares are down 48% in the past 10 years.
Still, dividends over the decade have greatly reduced my loss. And if close to break-even is the worst I do in a FTSE 100 sector that’s been hammered, it’s a level of risk I can handle.
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Next five years?
What might the next five years hold for the Lloyds share price? Well, if a stock really is undervalued, it must gain ground eventually, mustn’t it?
But even if the Lloyds share price, at 43.5p at the time of writing, doesn’t move, I still reckon that won’t be a disaster.
If the dividend keeps up, it looks like it could easily add at least another 15p in five years.
So even with no price gains at all, that’s 58.5p, or 34%. I’ve had far worse.
And, I buy new shares with my dividends each year. So I then get extra dividends from the new shares, which I can then use to buy more new shares… and so on.
Price gains
But what might send the actual Lloyds share price higher?
Earnings growth, for one thing. Forecasts suggest the financial sector should lead the FTSE 100 in earnings growth, by a big margin.
For Lloyds, we could see something like a 25% rise in five years — I have to estimate here, as forecasts only go three years ahead.
So if the price-to-earnings (P/E) valuation should stay the same, that could mean a Lloyds share price of 54.4p. Plus dividends.
Price recovery
But if I’m right about Lloyds shares being undervalued, I think that could drive the biggest gains of all.
The banks do face a tough year. And a weak UK economy might even hold them back for a few more years after that too.
But the Lloyds P/E is just six, which is only about half the FTSE 100‘s current level… and that in turn is down on its long-term average.
Whatever the short term holds, I just don’t think Lloyds shares can stay on such a low P/E for ever.
And if it should rise, even just to a modest 10, in the next five years? That could push the Lloyds share price above 90p. Add in five years of dividends, and we could be over £1.
Long-term value
Is all this guesswork and speculation worth anything? It might not be, so please do your own research and don’t just follow this.
But, sometimes when we invest for the long term, our shares just don’t do what we hope. And I then think it’s vital to sit back, run some numbers, and see if I was wrong.
So, I just need to be able to put numbers on things. And even speculative numbers can be a lot more useful than none at all.
