At first glance, recentshare price performance atLloyds Banking Group (LSE: LLOY) has been disappointing, with the stock falling 17% in the past 12 months. Its an anti-climax after the heady years of 2012 and 2013, when the share price almost tripled from 27p to 79p.
Big isnt beautiful
Naturally, no stock this size canmaintain that rate of growth for lengthy periods. As the FT recently noted, Lloyds is still the only one of the UK big four banks to have beaten the FTSE 100 index since 2012. Performancerelative to its sector has been good, with Barclays, HSBC Holdings and Royal Bank of Scotland Group all down between 30% and 50% overthe same period.
I believe Lloyds recent sluggish performance is good news because investors now have anopportunity to buy before it embarks on the next legof its revival. The bankhas spent longer in recovery than Hollywood actor Robert Downey Jr, but without the inspirational comeback. However, that moment is moving closer, as the bank now boasts a healthyTier 1 capital ratio of 13% and a total capital ratio of 21.4%.Itscapital largely restored, its increasingly in a position to pass on the surplus to investors, in the shape of special dividends and share buy-backs.
Clean and mean
That Downey Jr moment is edgingcloser with the happy surprise of no furtherprovision for PPI claims in Q1. Themis-selling scandal continues to generate 8,500 complaints a month but these are in line with expectations.Credit quality remains strong with impairments down 6% and with scant sign of aUK interest rate hike on the horizon, theyshould remain low.
At todays price of 72.5p Lloyds is only slightly below the level at which Chancellor George Osborne can sell it off and claim to have made a profit for the taxpayer (break-even point is73.6p). As a taxpayer, I would like Osborne to hold onto the stock for longer to see how much profit we can all make, but as an investor I would like him to get rid, so the shadow hanging over the bank can finally be cast off.
Dividend delight
Today, Lloyd yields 3.1%. By December, that shouldalmost double to 6%. By the end of 2017, consensus forecasts suggestitwill hit 7%. A number of FTSE 100 stocks already yield that amount, but in manycases the dividend is under threat. Trading at 8.5 times earnings, Lloydsstill looks like a no-brainer for long-term dividend-seeking investors, even ifmarkets dont quiteshare my enthusiasm.
They worry that Lloydswill struggle to grow, given its dominant position in amature domestic market, and loss of appetite for global expansion. Income actually fell1% in Q1, which is a concern, even if the bank offset the loss by cost-cutting across the business to post operating profits of 2.1bn.
Lloyds is being targeted byyoung and hungry challenger banks, andhas the Competition & Markets Authority snapping at its heels, desperate to boost competition butunable to persuade apathetic customers that switching current accountis worth the effort involved. Britons are more likely to get divorced thandump their bank. Lloyd still faces challenges butits dividend prospects should sweep away all doubts.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
