Surely the Lloyds share price has gone too high?

The Lloyds (LSE:LLOY) share price has risen to new post-pandemic heights with Labour’s landslide election win pushing the stock higher.

The British lender stock is now up 32.97% over the past 12 months, and this may lead many investors to question whether Lloyds is getting a little expensive.

Not as cheap as it used to be

Lloyds stock isn’t clearly undervalued in the way that it was. The stock is currently trading at just 5.6% below its share price target. A year ago, the average share price target suggested that Lloyds was trading at a near-40% discount.

It’s worth recognising that the average share price target, which is comprised of all analysts’ forecasts, isn’t always correct. In fact, sometimes it can be way off.

However, it’s also the case that Lloyds’ valuation metrics are no longer as cheap as they once were. The stock is currently trading at 10.2 times forward earnings, instead of around five times a year ago.

Moving forward to 2025, Lloyds is trading at 8.2 times expected earnings. This falls to 6.9 times in 2026 as earnings improve further.

Fresh hope for the valuation gap

UK-listed stocks trade with significant discounts to their US-listed counterparts in pretty much all sectors, with the current exception of defence. This is called the valuation gap.

Banking, however, is no exception. Here’s how Lloyds compares to US-listed peers JPMorgan and Bank of America on a forward price-to-earnings (P/E) basis.

Lloyds is substantially cheaper than these American peers. In fact, the data doesn’t show the full depth of the valuation gap, and that’s partially because Lloyds looks more expensive than usual for 2024 because earnings will be impacted by fines and a rise in corporation tax.

I’m wondering, and I believe many institutions and analysts are doing the same, if this valuation gap may shrink in the coming years. And, yes, politics is part of the equation.

Labour-run Britain is starting to look like an island of stability in an increasingly polarised and non-centrist world. Stability is vital for investment, confidence, and the economy as a whole, and Lloyds is often seen as a barometer for the UK economy.

So, does this mean the valuation gap will become smaller? Well, there’s more hope than there has been.

However, it’s worth bearing in mind that Lloyds is a much less diversified offering than its big-name American peers. It doesn’t have an investment arm and only operates in the UK.

That’s a concern for some investors at a time when interest rates are high and some customers are struggling to repay their loans/mortgages.

Less diversification means more risk, and more risk means cheaper valuation.

Is Lloyds overvalued?

Valuation data is open to interpretation. Sometimes a stock at 120 times earnings — like Nvidia a year ago — can actually be better value than a company in decline that trades at five times earnings.

Personally, I don’t think Lloyds is overvalued. And that’s purely because the valuation data is still heavily discounted relative to American peers, earnings strengthen over the medium term, and the dividend yield is an attractive 4.7%.

This post was originally published on Motley Fool