The Lloyds (LSE: LLOY) share price hit a high of 57.4p last week, its highest level in over four years. Barring a few single-day price jumps in January 2022, the price has yet to trade consistently above 55p since February 2020.
Looking at the charts, 55p seems to be a stubborn price point that it’s having difficulty rising above. In January 2022 the share price briefly touched 56p only to decline again in the months after. In February 2023 it once again came close but then retreated again.
Could this time be different?
With the share price now at such a high level, traditional logic dictates a reversal is on the cards. But as we’ve seen recently with stocks like Rolls-Royce, that’s not necessarily a given. With strong earnings, Lloyds shares are estimated to be undervalued by 15% using a discounted cash flow model.
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That suggests the price still has some room to grow.
But the price-to-earnings (P/E) ratio says otherwise. At 7.7, it’s slightly above other banks like HSBC and NatWest. Furthermore, with earnings per share (EPS) forecast to decline, the ratio could rise to 9 times in the coming months. That would put increasing pressure on any further price growth.
That said, a high P/E ratio is not uncommon for banks with high loss provisions. Lloyds recently set aside £450m for potential damages related to a motor finance scandal and may have to provision more. That could be one reason why the ratio is currently so high.
Economic resurgence
The UK stock market has enjoyed a resurgence lately and the FTSE 100 hit a new all-time high, with most shares rising. But it could go either way for mortgage-focused banks like Lloyds. An improved economy could stimulate the property sector, increasing mortgage demand. However, a cut in interest rates would reduce margins for the bank’s loans.
Right now it’s difficult to call because inflation remains higher than expected, scrapping hopes of a June rate cut. This has been the case for the past few months, during which time the share price has risen steadily.
Dividend value
The key factor that I feel tips the scales in favour of Lloyds is the 5% dividend yield. Although payments were briefly paused during Covid, they’ve been fairly consistent for the past decade. And while 5% is slightly lower than some other UK bank yields, the payout ratio is low – so it’s unlikely dividends will be cut.
The dividend means the shares continue to provide value even if the price trades sideways for the rest of the year. But looking at historical movements, I expect it will make a move up or down soon.
For now, it’s difficult to say where it will go. I think a decisive and sustained move above 55p could instigate a strong rally to 60p. But the factors I noted above are holding it back. If things don’t work in its favour, a fall below 50p before year-end is certainly possible.
For now, I’m enjoying the dividend payments while keeping a close eye on developments.
