Lloyds (LSE: LLOY) shares have been cheap for quite some time, but recent rises make me think that might not be the case for much longer.
The share price has been quietly zipping upwards and on 12 March finished the day at 49.55p.
I expect the share price to rise further and that could be the last day we ever see Lloyds shares below 50p.
Last chance?
Why? Well, the first reason is the billions of pounds spent on share buybacks.
While many investors prefer a dividend – and the cash in their account – buybacks have a proven effect on share prices.
Since 1994, the S&P 500 Buyback Index returned 13.29% annually compared to the S&P 500 of 8.96%.
Lloyds spent £2bn on buybacks last year – an amount that rocketed annual capital return above 14%. The bank revealed a new round of £1.8bn buybacks in February too.
I think we’re already seeing the result of that in surging share price and there’s plenty of petrol left in the tank.
Lloyds has had the cash flow to shell out on buybacks because of interest rates. High rates mean big earnings for banks. Will that continue?
Well, not even the Bank of England has a crystal ball when it comes to rates, but 10-year gilts are still above 4%.
Higher rates look set to stay and ZIRP (zero interest rates policy) looks dead and buried. I suspect the next few years will be profitable for banks.
Ghosts of 2008
And to top things off, I believe we’re at maximum pessimism in the banking sector.
We can talk about the “ghosts of 2008” until the cows come home but banks are more tightly regulated now.
Between solvency ratios and BoE stress tests, the sector is less prone to another collapse.
And yet banks stay absurdly cheap, I feel. Each 49p share of Lloyds hands me net asset value of 64p. Pre-2008 (with the same share price), I’d receive less than 17p!
These problems don’t plague US banks, which trade at around twice the earnings valuations of their UK counterparts.
So even a small shift in optimism in the finance sector could push the shares up. If valuations ever manage to match US ones, the shares would fly over £1!
I believe the impact of huge rounds of buybacks, sustained interest rates and rising investor optimism will lift Lloyds shares some distance above 50p.
Is this guaranteed? Of course not. The shares might keep floundering for any number of reasons. Lloyds has confounded optimists for years.
Buy low, sell high?
And even if we don’t see 50p again, Lloyds might not be a good buy considering the opportunity cost of investing in a better stock.
Still, ‘buy low, sell high’ opportunities are only obvious in hindsight. I suspect we might talk about Lloyds below 50p as an obvious ‘low’ one day so it’s worth doing further research, I feel.
This post was originally published on Motley Fool
