Is this another chance to buy before the Lloyds share price surges?

The Lloyds share price has come under pressure following renewed concerns about motor financing, but that shouldn’t spoil the broader picture.

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According to analysts, the Lloyds (LSE:LLOY) share price should be much higher. The average share price target for the company — representing the consensus of analysts’ opinions — is 65p. That’s 22.5% higher than the current share price. So is it worth me buying more?

Coupled with a 5.4% dividend yield, which is expected to grow in the coming years, investors could be looking at a near 30% return on this stock. At least that’s what we can deduce on paper.

It’s not always that straightforward

Price targets for UK-listed companies are complicated because these stocks often trade at a discount compared to similar firms in other markets. This discount arises from factors like lower valuations, economic uncertainties, and different investor preferences.

This is also contributing to why we’re seeing fewer companies choosing to list their shares in the UK. To put it in perspective, the £1bn raised on UK markets this year ranks 20th globally — behind countries like Oman and Malaysia — indicating that the UK is falling behind other markets in attracting new listings.

Sentiment is naturally key to this, and sadly Rachel Reeves’s first budget seems to have muted some short-lived optimism. In short Lloyds stock, which is often seen as a barometer of the UK economy given its dominance in mortgages, needs a catalyst if it’s to move towards its share price target.

Where could the catalysts come from?

Lloyds’ earnings forecast remains promising, despite a near-term dip in 2024, driven by the impact of a recent fine. Earnings per share are expected to fall from 7.97p in 2023 to 6.69p in 2024, but analysts forecast a 10% recovery to 7.39p by 2025, with continued growth into 2026.

The bank’s financial strength supports this recovery. It reported a statutory profit after tax of £3.8bn in the first nine months of 2024, achieving a 14% return on tangible equity, while maintaining a strong CET1 capital ratio of 14.3%. Dividends are projected to rise steadily, with yields potentially reaching 6.8% by 2026, reflecting confidence in long-term stability.

The improving UK economic outlook, combined with falling inflation, rate adjustments, and increased consumer spending, could boost lending and profitability. As the UK’s largest mortgage lender, Lloyds is well-positioned to benefit from these trends.

A new PPI scandal

However, there’s one unavoidable issue that goes against the broad economic trends that should support the share price flying higher.

The FTSE 100 bank is grappling with a new mis-selling investigation, this time focused on motor finance rather than the infamous PPI scandal of the 2010s. Back then, Lloyds paid an eye-watering £21.9bn to settle claims after being implicated in widespread PPI mis-selling.

Now a similar issue is surfacing, with the Financial Conduct Authority (FCA) examining the legality of commission payments from lenders to car dealers without customer knowledge — payments recently ruled illegal by a court.

Lloyds has already allocated £450m to address potential costs related to the FCA inquiry, but RBC analysts believe the final sum could climb as high as £3.9bn. While this amount is modest compared to the PPI debacle, the ongoing uncertainty will undoubtedly weigh on the share price.

Personally, I’m invested in Lloyds for the long run and I’m going to overlook this short-term challenge. If I wasn’t already heavily invested in UK banks, I’d consider buying this dip.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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