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Lloyds (LSE: LLOY) shares are trading near their 23 October 10-year high of 78p.
I think the driving force behind this is the latest in a series of share buybacks. These tend to support the stock price, as the bought shares are cancelled, so reducing public supply.
Recent programmes include £2bn in 2023, and £2bn in 2024. Another £2bn buyback is in progress this year.
Lloyds has said that these are part of its strategic effort to optimise capitalise structure and improve earnings per share.
That said, I am always concerned that a firm effectively bidding its own stock up may distract from weak fundamental valuations over time.
How does the core business look?
It is a firm’s earnings growth that powers its share price and dividends higher over the long term. It is not simply a company just buying its own stock, as this eventually becomes unsustainable over the years.
A risk to Lloyds’ earnings is the as-yet-undetermined level of mis-selling compensation that will be due to its car insurance clients.
Another is any further sustained decline in interest rates in its key UK market. This could squeeze its net interest income – the difference in money made from the interest on deposits and loans.
And Lloyds’ recent results have not been good in any event. In full-year 2024, statutory profit after tax tumbled 19% year on year to £4.477bn. In Q1 2025, the same measurement fell 7% to £1.134bn.
Are the shares overvalued now?
Just because a share price has risen a lot does not mean no value remains in it. It could simply be that the business itself is worth more than it was before and the new price reflects that.
On the price-to-earnings ratio. Lloyds looks very overvalued at 12 against its peer average of 9.3. These comprise Barclays at 8.2, NatWest at 8.7, Standard Chartered at 9.7, and HSBC at 10.5.
It is also overvalued – albeit slightly – at a price-to-sales ratio of 2.6 compared to a competitor average of 2.5. And the same is true of its price-to-book ratio of 1 against the 0.9 average of its peers.
However, a discounted cash flow analysis paints a different picture. Using other analysts’ numbers and my own, this suggests Lloyds shares are 45% undervalued at their current 77p. Therefore, their fair value is technically £1.40.
That said, this number reflects consensus analysts’ forecasts that its earnings will grow by 14.9% a year to end-2027. I am not sure these reflect either the current operational malaise evident in its results or the future risks.
So will I buy the stock?
Over and above the other risks I see in the bank, I am still concerned about its sub-£1 price. This does not officially put it in the ‘penny share’ bracket, as the bank has a market cap of very much more than £100m.
However, it does mean that the shares have the same extreme price volatility risk as penny stocks. Every 1p move in Lloyds shares currently constitutes 1.3% of the stock’s entire value!
I think this, and the other risks, are sufficient to deter me from buying the stock.
For investors with a much higher risk tolerance than I have, perhaps the shares might be worth considering.
