Lloyds (LSE: LLOY) shares have had a good year. Shares in the Black Horse bank have benefitted from a higher interest rate environment, less regulatory uncertainty, and a stronger-than-expected UK economy.
The company’s share price is up 87.9% in the past 12 months to 99.9p as I write on 12 January. That means those that bought at the 13 January 2025 closing price of 53.18p have earned a handsome return on their investment.
Indeed, a £1,000 investment would have increased to £1,879 not including dividends. With a 3.3% dividend yield and share buybacks, the total return figure would be even higher.
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What’s happening to the Lloyds share price?
The strong recent gains have come on the back of stronger profits and generous cash returns to shareholders.
For the financial year ended 31 December 2024, Lloyds reported pre-tax profit of £5.97bn, down from £7.5bn after taking roughly £700m in extra provision for motor finance mis-selling payouts. Notably, the company still launched a £1.7bn share buyback programme.
Fewer shares outstanding and solid earnings have helped lift the price, even as the car finance issue rumbles on, albeit with some more clarity over anticipated payouts.
Dividends add another layer of returns. Between last January and today, an investor would have collected a final 2024 dividend of 2.11p per share and an interim 2025 dividend of 1.22p, a total of 3.33p.
Valuation
Following such a strong run, Lloyds shares no longer look like a bargain. The stock has a price-to-earnings (P/E) ratio of 15.2 to go with its trailing 3.3% dividend yield.
A common valuation metric for banking stocks is the price-to-book (P/B) ratio, which assesses the stock’s market value against the book value of its assets.
The bank’s P/B ratio of 1.3 is roughly in line with peers like HSBC (1.4) and NatWest (1.2), but higher than Barclays (0.9). This suggests the market is also pricing in a clear premium to own the stock.
My verdict
A notional £1,000 invested in Lloyds shares last January would have grown by 87.9% to £1,879 as I write today, excluding dividends and share buybacks.
Robust net interest margins and a higher interest rate environment, despite recent cuts, have certainly helped out UK banking stocks in recent times.
Of course, investors should always consider the risks of investing. Lloyds is tightly linked to the UK economy and housing market, and the final cost of the motor finance scandal remains uncertain, which could pressure future profits.
Further interest rate cuts from the Bank of England could also put more pressure on margins as competition for winning and retaining customers heats up. All in all, I think Lloyds is a fairly priced UK banking stock that could be a useful addition to a well-diversified portfolio, but I think there are more exciting opportunities elsewhere in the FTSE 100 Index.
