Lloyds (LSE: LLOY) shares have risen 51% from their 25 October 12-month traded low of 39p. This is just 2p away from their 29 July one-year traded high of 61p.

Some may think this price action means there is little room for further gains from the stock. Others may feel compelled to jump on the bullish bandwagon for fear of missing out.

To me as a long-term investor such considerations are irrelevant. The only key question in my view is whether there is any value in a stock. If there is, I might buy it, depending on how it fits into my investment portfolio.

Are the shares undervalued?

Earnings growth powers a firm’s share price (and dividend) over time. In Lloyds’ case, consensus analysts’ expectations are that its earnings will rise 5.2% each year to the end of 2026.

A discounted cash flow analysis using other analysts’ figures and my own shows Lloyds to be 51% undervalued at its present price. So a fair value for the shares is £1.20.

This does not necessarily mean they will ever reach that level, of course. But it does highlight that the stock could be a bargain despite its recent gains.

Where will the growth come from?

Back in 2022, Lloyds laid out its new strategy for the following three to five years. Around two-thirds of its £3bn investment from 2022 to 2024 was aimed at growing and diversifying revenue.

The first of the four main pillars meant to achieve this is to deepen and innovate its consumer business. The second is to create a new offering for the ‘mass affluent’ market (those with an annual income or investable assets of at least £75,000).

The third is to digitise and diversify its small- and medium-sized enterprises business. And the fourth is to develop its Corporate and Institutional (investment banking) business.

Lloyds aims by end-2026 to have a return on tangible equity (ROTE) of greater than 15% versus 13.5% now. Unlike return on equity, ROTE excludes intangible elements such as goodwill.

How’s it been doing?

Its 2023 results showed net income rose 3% year on year to £17.93bn, with statutory profit after tax jumping 41% to £5.52bn.

For H1 2024 it saw net income falling 9% over the same period last year to £8.39bn. Statutory profit after tax dropped 15% to £2.44bn.

The decline in both headline numbers reflected a drop in its net interest margin. This is the difference between interest received from loans and paid on deposits. 

This decline will likely continue as UK interest rates fall, and it remains the main risk for the bank.

Will I buy the shares?

I have focused on stocks that pay a dividend yield of over 7% since I turned 50 a while ago. Currently, Lloyds returns 4.7%.

That said, it increased its interim 2024 dividend by 15%. The total dividend would be 3.174p if the same rise were applied to it. This would give a yield of 5.4% on the current 59p share price.

Analysts further forecast that the payouts in 2025 and 2026 will be 3.28p and 3.85p respectively. These would yield 5.6% and 6.5% on the present share price.

This is still not enough of a yield to tempt me.