The latest global turmoil hasseen Chinese share trading halted for the second time in a week with worldwide markets falling too, coupled with oil hitting ever-lower prices and Middle East tensions escalating. Thats been hitting our FTSE 100 banks too, but I reckon its throwing up even better bargains.
After a steady recovery from the depths of the crisis, Lloyds Banking Group (LSE: LLOY) shares have been dipping again of late and have lost 20% since their May 2015 peak, trading at 69p as I write. That puts iton a forward P/E multiple based on 2016 forecasts of just 9.2, when the long-term FTSE average stands at around 14.
I saidrecently that there could be a substantial upside for Barclays in 2016 the turmoil has now pushed Barclays shares down to a forward P/E of only 8.2. And I reckon the same is true of Lloyds, especially as Lloyds is expected to pay out a significantly higher dividend yield than Barclays, of 5.1% against 3.6%.
Oversold?
Although theres probably some natural cyclical contribution to the current downturn, I thinkthe fall is overdone. And if we assume a long-term P/E for Lloyds of close to the market average, wed be looking at a potential price gain of around 50% needed for a recovery to those levels. But on top of that, the high and progressive dividends (the FTSE average is only a little over 3%) suggest a higher rating would be justified. And I dont think 60% is in any way an unreasonable target. That would imply a price of around 110p.
How reliable is that dividend going to be? At the first-half stage this year, chief executive Antonio Horta-Osorio said:Our aim is to have a dividend policy that is both progressive and sustainable. He added:We expect ordinary dividends to increase over the medium term with a dividend payout ratio of at least 50 per cent of sustainable earnings. That would imply a yield of 5.6% for 2016 would be closer to the firms medium-term targets, so theres still room for a small further rise even without future earnings growth. With growth, I could see an effective yield at todays price of 6% to 7% in two or three years.
What stress?
In the most recent Bank of England stress tests, reported on 1 December, Lloyds comfortably exceeded the required thresholds. Lloyds reported CET1 ratio of 12.8% and leverage ratio of 4.9% dropped only to 9.5% and 3.9%, respectively, in a modelled world of 9.2% unemployment and falls of 20% and 30% in housing and commercial property prices, respectively. Thered be no cap-in-hand begging at the governments door in such a scenario next time.
One downside of Lloyds thoughis the governments ongoing sell-off of its stake, which has been satisfying much of the institutional demand for shares and helping to keep the price down. With a target of disposing of the remaining stake of less than 11% by mid-2016, the overhang effect should continue for some more months, though as long-term investors we might have a little while yet to buy-up shares while theyre cheap.
Long-term cash
My suggested price targets here are really just speculation, of course, and the short term isnt what counts. Over the long term, I see Lloyds as a strong income stock, with attractive growth prospects thrown in and yes, I really can see itas one of 2016s FTSE 100 winners.
It’s hard to beat the idea of putting your money into top dividend-paying companies with progressive cash-handout policies, which have the potential to lift your income year after year. Our newest report, A Top Income Share From The Motley Fool, reveals a company that might just fit that bill.
It’s a company with a market cap of around 500m, so it’s not a high-risk tiddler, and dividends have been growing very strongly over the past few years.
Want to know more? Click here to get your completely free copy of the report delivered to your inbox today.
Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
