The Lloyds Banking Group (LSE:LLOY) share price is up a generous 39% over the past year. The business has seen the rise partly thanks to growth in key business metrics. However, with Lloyds shares close to 52-week highs, some will be wondering if the growth can continue. Here’s the latest forecast and how I think it could impact the stock going forward.
Checking out the numbers
Let’s take a look at the projected earnings per share for the bank. In theory, the share price should trade at a multiple of the earnings per share. If the earnings increase, it’s logical that the stock should move roughly in tandem.
The average forecasted earnings per share for this year from 16 analysts is 6.69p. For 2025, this rises to 7.39p. It’s worth noting that the 2024 forecast will only be realised with the release of the annual report in 2025. The 2025 figure will be released in 2026, so there will be some lag in the share price as investors wait for the figure.
For reference, the 2023 earnings per share was 7.97p. So for the coming year, the expectation is actually for earnings to fall to 6.69p, a drop of 16%. However, it’s then forecasted to jump by 10% for the following year.
What this means for the stock
At the moment, Lloyds shares trade with a price-to-earnings ratio of 7.78. In my view, this is undervalued and I expect it to move higher towards a ratio of 10 over the coming year. If I assume this is correct, then even if earnings per share fall to 6.69p, the share price could still rally from the current level of 58.6p to 66.9p over this period.
The risk to my view is if investors get spooked by factors including falling interest rates and potential lower economic growth. For example, lower interest rates would mean that the profit margin the bank makes on deposits and loans would shrink. This would hamper any growth prospects for the bank and could act to reduce future earnings even more. As a result, the stock could fall rather than rally.
Other factors to consider
I need to remember that projected earnings growth is only one factor that goes into influencing the share price. Granted, it’s arguably the most important! But there are other things investors look for.
For example, the stock could rally in the coming year as those looking for income will likely be happy with the 4.71% dividend yield on offer. This is above the FTSE 100 average.
Another factor is company-specific updates. In the coming few months, we’ll get a Q3 update. There may be points within it that change the outlook for investors, either in a good or bad way. As a result, the stock will then adjust accordingly.
This post was originally published on Motley Fool
