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What would it take for Lloyds shares to climb in value?

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At 49p, the Lloyds Banking Group (LSE: LLOY) share price is still stuck under 50p, but it’s edging closer. What would it take for Lloyds shares to climb? Or maybe even double, and break out of penny share territory?

I’m not predicting if, or when, a doubling might happen. But I do think Lloyds is undervalued, and I want to think about what might shift the price upwards.

Dividends

Despite the poor share price performance, I’m happy with the dividends from my Lloyds investment. But I think that’s one of the things that could bring about an uprating in investors’ minds, and we’re just not there yet.

Dividends were starting to come back after the financial crisis, but we had Brexit and Covid. The 2021 year provided a 4.2% yield, which was about average for the FTSE 100.

Forecast rises

Forecasts suggest 5.1% this year, reaching 6.5% by 2024. That’s good progress, though not enough to justify a doubled share price — that would mean a 2024 yield of just 3.25%.

I think it does suggest higher future share prices. But I suspect investors will need to see a longer spell of sustained dividend rises in order for the general sentiment to shift. On a related issue, Lloyds’ 2022 share buybacks should help. Future dividend cash will be spread across fewer shares, and that should mean slightly better yields.

Economy

The economy has to be the big thing holding back bank shares. In one way, higher interest rates to deal with inflation should benefit Lloyds. It’s the UK’s largest mortgage lender, and higher rates make for bigger lending profits.

Against that, we have fears for the property sector. I don’t share those fears, at least not in the long term. But in the short term, fewer people taking on new mortgages won’t help. And increased risk of non-payments could mean Lloyds has to set aside more cash for bad debt provisions — just as it was unwinding its pandemic provisions.

So, I doubt we’ll see any major uprating of the Lloyds share price until we emerge into a brighter economic outlook.

More of the same

Essentially, though, I think what Lloyds needs is to just carry on doing the same. That includes being conservative with its balance sheet, and returning excess capital only when the risk is low. I like share buybacks, as they set no future expectations. If the bank raised dividends, by contrast, we could end up seeing share price pain should it need to reverse it at any time.

Lloyds has chosen to focus on UK banking, and has gone big on the mortgage and property markets. For the long run, I like that strategy and I want to see Lloyds sticking to it.

Future gains?

Will the Lloyds share price keep climbing? I think it will, over the long term. But I fear the things that could drive it will take a few more years to come good. Investors might need to be patient for some time yet. And I’m just going to keep taking my dividends. Oh, and maybe buy more Lloyds shares while I think they’re cheap.

The post What would it take for Lloyds shares to climb in value? appeared first on The Motley Fool UK.

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Alan Oscroft has positions 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.