The last 10 years have not been kind to Lloyds Banking Group (LSE: LLOY) shareholders. Investors who bought Lloyds shares this time in 2012 will be surely be nursing sore heads today.
Or will they? Even after the pandemic, the Lloyds price is up 4.5% over the past 10 years. Covid hit the banking sector, but a decade ago, Lloyds was still reeling from the financial crash.
It’s still poor, considering the FTSE 100 rose 21%. And 4.5% over a decade would be beaten even by a savings account. I hope the old investing warning that past performance is not an indicator of future performance comes good.
Dividends
But, before I look at what the next 10 years may bring, I’ve missed something — dividends. Over the decade, £1,000 invested in Lloyds in 2012 would have generated nearly £400 in dividends. That would have turned the original investment into a pot worth around £1,440 today.
Considering the banking sector is widely seen as one of the lamest stock market investments of the past couple of decades, I’d say that’s actually not too bad.
The next 10?
What might the next decade hold? Forecasts suggest a 5% dividend yield for the current year. It’s possible that dividends might need to be cut in the next 12 months, or so. But if they are, I’m hopeful they’ll get back to progressive growth over the remainder of the decade.
What would 5% per year for 10 years get us? If we reinvest the cash every year, it would turn £1,000 invested today into £1,630. That’s a 63% gain just from dividends.
But nobody investing in Lloyds today would expect the share price to stand still, would they? How much might it grow by?
Double in price?
Lloyds shares are on a low forecast price-to-earnings (P/E) ratio of approximately 6.3. That’s how many years it would take for earnings to cover today’s share price, and it’s not very long.
The long-term average P/E for FTSE 100 shares has been around 14 to 15. Does that suggest a fair long-term valuation for Lloyds would mean the share price doubling?
Well, confidence in banks has been low for a very long time, and I suspect it could remain relatively weak for some years to come. But even if Lloyds should recover to a P/E of 10 in 10 years, that would still suggest close to another 60% gain.
Add those possible dividend returns, and we get a total gain of around 120%. I’d be happy to take that from a decade-long investment.
Not a forecast
So could a Lloyds investment today more than double in a decade? Well, I must stress that these are not forecasts, and I’m not making any predictions. These are just ‘What if?‘ ideas, plugging in a few numbers that I think might be reasonable. There are plenty of other possibilities, like what if we suffer a long recession?
Lloyds remains a strong buy for me at today’s price though, and a top-up is very much on my shortlist for my next investment.