One of the difficulties of being an investor is that share prices dont always move in the right direction. In other words, profits arent smooth and steady, but rather come and go often in a relatively short space of time. This can leave many investors feeling down about their portfolios and cause some to sell up and walk away, which is how many investors in Lloyds (LSE: LLOY) may be feeling right now. Thats because its shares have fallen by 12% in the last year and are showing little sign of a sustained recovery especially following last weeks disappointing first quarter results.
However, when a companys share price moves lower, it can signal a further buying opportunity rather than a moment to sell and reinvest elsewhere. Thats provided that the company in question is still offering a bright long-term future and isnt a value trap thatscheap for a very good reason. If its the former, buying a company with a depressed share price can lead to stunning gains.
This situation seems to be the one facing Lloyds at the moment. Despite its aforementioned share price fall, its prospects are still very bright. For example, its continuing to improve its balance sheet strength following a period of asset disposals. This leaves it not only better equipped to deal with a potential downturn, but has also caused Lloyds to become increasingly efficient especially versus its sector peers. Therefore, it seems to be in a position through which to generate rapid profit growth in the long run.
Improving economy
In addition, Lloyds is likely to benefit from an improving UK and global economy. With it having a significant exposure to the UK housing market through its acquisition of HBOS during the credit crunch, Lloyds seems to be well-positioned to benefit from low UK interest rates thatcould boost the prospects for the UK property sector. And while the global economic outlook remains uncertain, growth rates are still relatively strong and the long-term outlook is positive due in part to the future prospects of the developing world.
As well as a bright future, Lloyds also seems to have a sound strategy thatcould cause investors to flock to its shares. Lloyds is in the process of gradually increasing its dividend payout ratio so that its yield is likely to rise over the medium term. In fact, Lloyds yield is expected to be as high as 7.5% in 2017 and this would put it towards the top of the FTSE 100 yield table. And with dividends still set to be covered 1.5 times, theres scope for even greater increases in shareholder payouts over the medium term.
With Lloyds trading on a price-to-earnings (P/E) ratio of just 9, it seems to offer excellent value for money given its future prospects, income potential and strategy. Soit could be argued that you would be mad to sell up even after the disappointment of the last year.
Despite this, there’s another stock thatcould outperform Lloyds in the coming years. In fact it’s been named as A Top Growth Share From The Motley Fool.
The company in question could make a real impact on your bottom line in 2016 and beyond. And in time, it could help you retire early, pay off your mortgage, or simply enjoy a more abundant lifestyle.
Click here to find out all about it – doing so is completely free and comes without any obligation.
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.
