What next for the cheap Lloyds share price?

Key points

• The company has a compound annual EPS growth rate of 11.25%
• The Bank of England recently increased interest rates from o.5% to 0.75%
• The cost of living is rising and this may translate into lower demand for mortgages and loans

As a retail and commercial banking firm, Lloyds Banking Group (LSE:LLOY) operates in the UK. Recently, the market has been volatile with issues like the Covid-19 pandemic, inflation, and the war in Ukraine. Where is the Lloyds share price going next? It currently trades at 49.97p, up 22.54% in the past year. Should I be adding this company to my portfolio and holding it for the long term? Let’s take a closer look. 

Recent results and the Lloyds share price

Between 2017 and 2021, the firm’s results have shown modest improvement. Revenue has grown from £34bn to £37bn, while profit before tax rose from £5.2bn to £6.9bn.

Unsurprisingly, earnings per share (EPS) increased from 4.4p to 7.5p. By my calculation, this is a compound annual EPS growth rate of 11.25%. It is heartening to see that the business is delivering for its shareholders year in, year out. 

The 2021 results, in particular, are a vast improvement on the previous year. In 2020, for instance, revenue slumped to £29bn, while profit before tax was just £1.2bn. The pandemic may be the cause of weaker 2020 results, but it is encouraging to see a swift rebound in 2021. It should also be noted, however, that past performance is not necessarily indicative of future performance. 

I also strongly suspect that the current Lloyds share price is cheap. I have already written elsewhere that I think forward price-to-earnings (P/E) ratios suggest that the share price is cheaper than, for instance, Standard Chartered.

Furthermore, Credit Suisse recently marked Lloyds as a ‘top pick’. Given that the current price is around the 50p mark, I think there could be great upside potential.  

Interest rates and the cost of living

The Bank of England recently increased interest rates to 0.75% from 0.5%. This is likely good news for the company, given that this allows the business to charge more for its borrowing services. In fact, the Lloyds share price is up 5.6% since this interest rate announcement on 17 March 2022. 

With the Bank of England also predicting that inflation will reach 8% in spring 2022, however, this could make life more difficult for those whose wages lag inflation. Furthermore, it may make people spend less, perhaps negatively impacting the mortgage and loan products offered by Lloyds.

Only today, Chancellor Rishi Sunak announced that for the 12 months to February 2022, prices rose by 6.2%. This is the fastest rate in 30 years.

There are of course challenges ahead for this banking industry giant. The cost of living crisis could prove to be difficult to navigate. On the other hand, it may be a short-term issue that could subside quickly. What’s more, historical results show solid growth and the current Lloyds share price may be cheap.

Although I think the share price will likely head upwards in the long term, I won’t be buying shares today. I won’t, however, rule out a purchase in the future.