Shares in Lloyds (LSE: LLOY) (NYSE: LYG.US) have fallen by 3.5% during the course of 2014, which is clearly a disappointing result for investors in the bank. However, it continues to make encouraging progress with regard to its rationalisation programme, which has seen the bank become leaner, more efficient and has been a key reason why it is forecast to return to profitability this year.
In addition, Lloyds recently passed the Bank of England’s stress test and, looking ahead to next year, it is expected to post respectable growth numbers and pay a decent dividend. However, is this likely to be enough to push its share price to 100p? Or, is Lloyds really worth little more than 50p per share?
Valuation
Of course, a key reason why Lloyds could be worth more than 100p is its valuation. It currently trades on a price to earnings (P/E) ratio of just 9.7, which seems very difficult to justify when the FTSE 100 has a P/E ratio of 14.9. Certainly, the bank’s asset base has been subject to considerable write downs in recent years but, with the UK economy now moving from strength to strength, the scale of write downs moving forward is likely to be far less than in the past.
Therefore, while Lloyds may have deserved to trade at a substantial discount to the wider index in the past, the current scale of the discount is unlikely to last the course in 2015. As such, Lloyds could see its share price move higher over the course of the next year and, for it to reach 100p, it would only require a P/E ratio of 12.8, which is still far below that of the FTSE 100 and, as such, seems very achievable.
Income Potential
As for what else could push Lloyds’ share price to 100p, its goal of paying out 65% of profits as a dividend could make it a superb income play. For example, next year it is forecast to yield 3.8% at its current share price and that’s even with a payout ratio of just 35%. Were the payout ratio to reach the target of 65% by 2016 and earnings growth flat line between 2015 and 2016, it would mean that Lloyds yields 7% at its current share price. This would make it one of the highest yielding shares in the FTSE 100 and could help to propel it towards 100p.
Possible Risks
Clearly, a fall to 50p cannot be ruled out. The situation in the Eurozone remains precarious and the ECB’s QE programme may not prove to be as effective as those of the US and UK. In addition, the Russian crisis could knock confidence among investors, while a Labour victory at the General Election could mean significant policy change regarding the part-nationalised banks, in terms of how shares will be sold off.
So, while Lloyds does appear to be worth well in excess of 100p per share, external factors could hold it back over the short term. However, it appears to be well-worth buying and could be a star performer moving forward.