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Lloyds’ share price: 3 reasons why I think it could rise in 2021

Edward Sheldon, CFA
·3-min read
A stock price graph showing growth over time, possibly in FTSE 100
A stock price graph showing growth over time, possibly in FTSE 100

Lloyds Bank (LSE: LLOY) shares have performed well recently. Since the start of November, Lloyds’ share price has risen from 28p to 36p. That represents a gain of nearly 30%.

Looking ahead, I think the shares have the potential to keep rising in 2021. Here are three reasons why.

Global investors are buying UK shares

The first reason I think Lloyds’ share price can continue to rise is that sentiment towards UK stocks appears to be improving dramatically. For the last few years, many large global institutional investors have avoided the UK market due to the high level of political uncertainty associated with Brexit. This has kept UK share prices depressed.

However, now that there’s more clarity on Brexit, institutional money appears to be flowing back into the UK. This is illustrated by the fact that the FTSE 100 index jumped more 6% in the first week of the year compared to a 2% rise for the US’s S&P 500. If sentiment towards UK stocks continues to improve, Lloyds shares should benefit.

Lloyds shares are cheap

Another reason I believe Lloyds shares have upside potential is that ‘value’ and ‘cyclical’ stocks are expected to make a big comeback this year. For years, these types of stocks have underperformed ‘growth’ stocks. However, with the global economy in the early stages of a recovery post-Covid, many experts expect value and cyclical stocks to outperform growth stocks in 2021.

Lloyds is certainly a cyclical stock. Its earnings fluctuate depending on economic conditions. It’s also very much a value stock. Right now, its forward-looking P/E ratio is just 11.

If investors continue to direct money into these areas of the stock market, Lloyds’ share price could continue to rise.

Lloyds shares could pay dividends in 2021

Finally, I expect Lloyds, and the other UK banks, to resume paying dividends in 2021 as the Bank of England recently lifted its ban on bank dividends. A dividend will increase the appeal of owning the shares and this may push the share price up.

Currently, City analysts expect a dividend payout of 1.63p per share for FY2021. At Lloyds’ current share price, that equates to a yield of about 4.4%. That’s certainly an attractive yield in the current low-interest-rate environment.

Investors should note, however, that dividend forecasts can be quite inaccurate at times. So, this forecast for Lloyds’ dividend should be taken with a pinch of salt.

Is Lloyds a good stock to buy?

I will point out that while I believe Lloyds’ share price has upside in the near term, I actually don’t see the stock as a great long-term buy. There are two key reasons why.

Firstly, interest rates are likely to remain low for a while. This will impact banks’ ability to generate profits.

Secondly, financial technology (FinTech) companies and digital banks are advancing at a spectacular rate right now and aggressively targeting banking market share. I expect FinTech to create a lot of challenges for traditional banks such as Lloyds in the years ahead.

I own Lloyds shares and I’m going to hold onto them for now. However, at some stage in the not-too-distant future, I’ll be looking to sell them. My plan is to switch the money into a stock with more attractive long-term growth prospects.

The post Lloyds’ share price: 3 reasons why I think it could rise in 2021 appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Lloyds Banking Group. 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