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3 reasons why I think the Lloyds share price will reach 49p this year

Jonathan Smith
·3-min read
Young woman sat at laptop by a window
Young woman sat at laptop by a window

So far in 2021, the Lloyds Banking Group (LSE:LLOY) share price has been muted. The price closed Monday around the 34p mark and has ranged from that level to just over 37p so far this year. After the slump during the stock market crash in March last year, the share price hasn’t managed to get back to previous levels around 55p. Had I bought pre-crisis, I’d be holding the stock at an (unrealised) loss. With no dividends being paid, a kick higher is needed for the Lloyds share price in order to start momentum again. So what could be some of these drivers and would I buy at its current low level?

Value and dividends

According to my figures, the market capitalisation of Lloyds at the moment is around £24.6bn. The enterprise value (an alternative way of measuring the net worth of a business) stands at £34.8bn. So if the share price rallied so that the market capitalisation equalled the enterprise value, this could be seen as a fairer price. What would this price be? Well, with 70.84bn shares in the market, this would put the Lloyds share price at 49p.

Also, it’s worth me thinking about the potential of a return of dividend payments. For companies in the financial services sector, dividends are a key way to keep shareholders happy. Last year the regulators strongly advised banks to not pay a dividend due to the pandemic. The pre-Covid dividend of 3.2p per share is therefore the last metric I have from Lloyds of potential payout numbers.

The share price fell around 45% last year. So the same payout per share would represent a much larger dividend yield for me. This is because the 3.2p represents a larger amount relative to the share price at 35p than it did at 55p. It would provide a dividend yield over 8.5%. If that was the case, those who look for income stocks might pile in, which I think could drive the share price higher. But of course, there’s no guarantee that the payout would match the last one and I think it’s unlikely to do so.

Brexit impacting the Lloyds share price

The UK has finally left the EU and so far we haven’t seen an apocalyptic crash to the economy. I could argue that this is because Covid-19 had already done the damage! Should the economy suffer no more teething problems from the regulatory changes from Brexit, this could support a Lloyds share price move back towards 50p. This is because Lloyds is seen as a proxy for UK-based businesses. It also has the largest retail consumer base out of the other banks. As a result, it will see the financial results driven by how confident and successful UK consumers are.

But being a proxy for UK-based businesses is also a risk to my overall argument. If the UK economy struggles due to Covid-19 and Brexit, the Lloyds share price is unlikely to gain traction. A dividend is unlikely to materialise. Added bad loan exposure could reduce the enterprise value, meaning the fair value of the stock comes lower as well.

Yet on balance, I’m optimistic going forward regarding the Lloyds share price. I think it really might reach 49p and that fits in which my investing goals so it’s back on my watchlist.

The post 3 reasons why I think the Lloyds share price will reach 49p this year appeared first on The Motley Fool UK.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Motley Fool UK 2021