2014 has been a tough time for investors in Lloyds (LSE: LLOY) (NYSE: LYG.US). Thats because shares in the part-government owned bank have fallen by over 2% since the start of the year, which is roughly in line with the FTSE 100s 2.5% fall during the same time period.
However, today it has emerged that Lloyds is set to announce a digitisation plan that will involve the automation of a number of processes, including mortgage processing and new account opening that could help to lower costs. Although this will inevitably mean a number of jobs are lost, for investors it could prove to be great news as a lower cost base could help the bank to squeeze out even higher margins and more profit moving forward.
A Wider Strategy
Of course, the digitisation strategy forms part of a wider strategy employed by Lloyds since the financial crisis. Over the last few years it has focused on reducing costs and making the business much more efficient. This has meant the disposal of a number of assets and business areas that were either too risky, or thatdid not produce sufficient returns to justify being part of the new, slimmer Lloyds.
This switch in strategy, of which digitisation is a key part, is having a positive effect on the banks bottom line. Indeed, Lloyds is set to return to profitability in 2014 for the first time since the start of the credit crunch, which is clearly great news for investors.
A return to profitability also means that the bank can start paying dividends, provided its financial situation allows, and this could prove to be the catalyst to push shares in Lloyds much higher.
Although the bank is expected to recommence dividends at a fairly pedestrian level, it has vast ambitions when it comes to shareholder returns. For example, it is aiming to pay out 65% of profit as a dividend in 2016.
Assuming that 2015s earnings forecasts are accurate and that the bank does not grow profit in 2016 (i.e. it is the same as in 2015, which is a conservative assumption), it would equate to dividends per share of 5.35p in 2016. Furthermore, if Lloyds were to trade on the same forward dividend yield as it currently does (4.1%), a dividend of 5.35p per share would equate to a share price of 130p.
This is 70% higher than the current share price and, while it may seem a long way off, with continued cost cutting, an improving UK economy, and a commitment to a payout ratio of 65%, 130p may turn out to be very realistic price target over the medium term.
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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.