Life has been tough as a shareholder in Lloyds (LSE: LLOY) (NYSE: LYG.US) during the course of 2014. Thats because shares in the part-nationalised bank are down by 6% since the start of the year, while the FTSE 100 is up 1% year-to-date. However, Lloyds could have a much brighter future ahead of it and could be well worth buying and holding for the following five reasons:
Lloyds is due to return to profitability this year for the first time since 2009. This is a tremendous turnaround for the bank after a number of challenging years. However, the best bit is that Lloyds is forecast to follow its first year of profitability with strong growth next year, when earnings are expected to rise by as much as 7%. This shows that 2014 is no flash in the pan, and Lloyds could be all set for a prosperous period.
A key reason for the successful turnaround has been a sound strategy. Lloyds has been ruthless with regards to which parts of its business are core to the long-term future of the bank, with it disposing of a number of entities that require too much capital, carry too much risk or that produce too little reward. A more efficient, leaner and more profitable bank looks set to remain.
Although not featuring in the headlines of late, the further sale of the governments stake in the bank could help to improve sentiment. Indeed, the sale of the governments stake seems to indicate to the market that things are looking up for the bank and that its future prospects are positive. Further sales could help to reverse the weak sentiment that has been prevalent throughout much of 2014.
Lloyds has the potential to become a seriously hot income stock. Thats because it is aiming to pay out around 65% of profit as a dividend by 2016. With bottom-line growth expected to be brisk, this could mean that shares yield considerably more than the wider index. If the bank hits its current forecasts, it could be yielding as much as 4.3% next year.
Despite all of the above, Lloyds continues to offer good value for money. For example, it currently trades on a price to earnings (P/E) ratio of just 9.4. This is considerably below the FTSE 100s P/E of 13.7 and shows there is considerable potential upside from a rerating.
Clearly, Lloyds has a large amount of potential and could give your portfolio a major boost. However, it’s not the only bank that could do so. That’s why we’ve put together a free and without obligation guide to the UK banking sector that could help you to identify which banks to buy, and which ones to avoid.
The guide is simple, clear and actionable – you don’t need to be a banking expert to put it to good use. As such, it’s well-worth a read and could make 2014 and beyond an even more prosperous period for your investments.
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Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.