Is Lloyds a Bargain After a Five Year 269% Stock Surge?

Considering what to do with Lloyds Banking Group stock? You are not alone. Over the past few years, Lloyds has made some serious waves on the market; just take a look at the numbers. The stock is up an astonishing 269.2% over five years and 125.8% across the last three, making long-term holders more than pleased. Even in the past year, shares have climbed 40.6%. Sure, there have been short-term dips, like a -1.4% slip over the past week, but the bigger picture still looks remarkably resilient. That is the kind of performance that tends to get investors asking whether this train has more miles to go.

The reasons behind these moves are as interesting as the numbers themselves. Lloyds has been making headlines with its renewed focus on digital transformation and customer experience, signaling to the market that it is not afraid of changing consumer expectations. Regulatory changes in the banking sector have also been making waves, shifting how investors perceive risk across UK banks as a whole. These factors, alongside broader economic optimism, have contributed to boosting Lloyds’ profile and, naturally, its share price potential.

With so much momentum, the big question now is whether Lloyds’ stock is actually undervalued, fairly priced, or already stretched. According to our valuation score, a straightforward measure that runs Lloyds through six key value checks, the company comes in at a 2 out of 6, suggesting it might not be a classic bargain at current levels. But to really understand what that means for your investing strategy, we need to look at how those valuation checks work in more detail and, later on, explore an even better way to judge Lloyds’ true worth.

Lloyds Banking Group scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Lloyds Banking Group Excess Returns Analysis

The Excess Returns valuation model assesses Lloyds Banking Group by comparing the returns it generates above its cost of equity. It focuses on how effectively the company invests its capital to produce shareholder value. In this model, the key numbers are as follows:

• Book Value: £0.67 per share
• Stable EPS: £0.10 per share (Source: Weighted future Return on Equity estimates from 14 analysts.)
• Cost of Equity: £0.06 per share
• Excess Return: £0.03 per share
• Average Return on Equity: 12.87%
• Stable Book Value: £0.77 per share (Source: Weighted future Book Value estimates from 9 analysts.)

With these figures, Lloyds is currently generating returns that outpace its cost of equity, which is a positive sign. The model calculates an intrinsic value of £1.37 per share. Given that the stock’s current price represents a 39.3% discount to this estimated value, the Excess Returns approach suggests Lloyds is undervalued at present levels.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Lloyds Banking Group.

Our Excess Returns analysis suggests Lloyds Banking Group is undervalued by 39.3%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Lloyds Banking Group Price vs Earnings

The Price-to-Earnings (PE) ratio is a popular way to value profitable companies like Lloyds Banking Group because it provides a quick sense of how much investors are willing to pay for each pound of earnings. A higher PE ratio often signals that investors expect higher growth, while a lower PE can mean lower growth prospects or higher risk. However, what qualifies as a “fair” PE depends on factors such as the company’s growth outlook and how risky the business environment is.

Currently, Lloyds trades at a PE ratio of 12.02x. This is above the average for its peers (9.78x) and also above the broader UK banks industry average of 10.32x. At first glance, this might make the stock seem relatively expensive compared to similar companies.

However, Simply Wall St’s proprietary “Fair Ratio” model takes a deeper approach. This Fair Ratio, calculated to be 8.98x for Lloyds, incorporates not just growth expectations and risk, but also profit margins, market cap, and the nuances of its specific industry. Unlike a basic peer or industry comparison, the Fair Ratio method adjusts for what really matters to shareholders, such as how quickly Lloyds could grow, the stability of those earnings, and the company’s unique risk profile.

Given that Lloyds’ current PE ratio of 12.02x is noticeably above its Fair Ratio of 8.98x, this suggests the shares are priced a bit ahead of their fundamentals according to this metric.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Lloyds Banking Group Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives. A Narrative is simply your unique perspective on a company, connecting the story behind its business with your assumptions for future revenue, earnings, margins and ultimately, what you believe the company is really worth. Instead of relying on static numbers, Narratives empower you to link Lloyds’ story, such as digital transformation or changing customer trends, to your own financial forecast and calculated fair value. This hands-on tool, available right now on Simply Wall St’s Community page (used by millions of investors), lets you pick or build a Narrative and see how the fair value it produces compares with the current share price to guide your buy, sell or hold decisions.

Even better, Narratives dynamically update as new earnings, news or business developments emerge, so your analysis always stays current. For example, one investor might focus on Lloyds' successful AI adoption and efficiency (see the £1.03 price target), while another may prioritize economic headwinds or regulatory risks (and land at the £0.53 target). Narratives make it simple and practical to choose the forecast and the story that aligns with your view, so you can invest with clarity and conviction.

Do you think there's more to the story for Lloyds Banking Group? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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