It was a good year for Lloyd’s (LSE: LLOY) shareholders. Lloyds share price is up 41% in the last 12 months. But after a strong start to 2022, the bank’s shares have recently stagnated.
Is this just a temporary setback that I can use as a buying opportunity for my portfolio? Or could Lloyds share price be heading for a sustained pullback?
Positive factors for the share price
First, it’s worth considering what drove the impressive performance of equities over the past year. Investors warmed to the strong recovery in trading performance seen at Lloyds last year. After 2020 was hit by uncertain business prospects and the potential for large defaults, 2021 offered something much closer to the status quo.
In fact, last year’s performance underscored just how attractive Lloyds can be when it’s on the upswing. At the end of the third quarter, it reported a huge portfolio of loans and advances of £450 billion. It is the largest mortgage lender in the country and that scale translates into significant profits – after-tax profits were £5.4billion for the nine months in question. The company also took the opportunity to improve its outlook for the full year. Final results are expected this month.
Last year, the company also reinstated its dividend, which it had been forced by the regulator to suspend during the pandemic. I think the restoration of the dividend has helped support the share price. Positive corporate performance or dividend news in this month’s final results could, in my view, help drive the stock price further higher.
Some risks with Lloyds
However, after the surge we have seen in the stock price, the high expectations are already priced in by investors. If the company’s results this month and its outlook for 2022 meet or exceed those expectations, I think there could be additional upside potential from here. But I also see risks.
After all, why has Lloyds, with its £37 billion market cap, stubbornly stuck to a penny share since the last financial crisis? The most likely explanation in my view is that many investors remain wary of the viability of the company’s business model during a severe economic downturn. The heavy reliance on home loans, concentrated in the UK, means that if a recession causes mortgage defaults to skyrocket, Lloyds could see its profits slump.
At present, the UK property market appears resilient. This could help support Lloyds share price. Indeed, as long as the real estate market remains robust, I think the price could continue to rise. So I don’t think he necessarily peaked. But given the cyclical nature of the economy, sooner or later real estate prices will fall. I expect this to hurt the stock price, although it may still take a few years in the future.
my next move
As a Lloyds shareholder, I will be interested to see what the company reveals in its final results this month. A substantial dividend increase would not only be good news in itself, I believe it could also boost Lloyds’ share price.
I see further possible upside in the stock and would consider adding to my stake this month ahead of the results.
The post Has Lloyds share price peaked? first appeared on The Motley Fool UK.
Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK recommended Lloyds Banking Group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.
Motley Fool United Kingdom 2022