After tippingLloyds Banking Group (LSE: LLOY) as my top stock for 2016 it was inevitable that it would beginthe year with a loud crash. It openedat 72p per share inJanuary but one month later had plunged 20% tojust 57p, and I bet you wish youhad bought it then.
You cant keep a good company down and the Lloyds share price has since rebounded26% torecapture its starting price of 72p, making it the poster boy for those who like to buy on the dips. Lloyds was still a good company when it crashed inJanuary, it was the blameless victim of a wider collapseinsentiment. It looks an even better company today, which is why it has rebounded so strongly.
Its interesting to note that stricken rivals Barclays and Royal Bank of Scotland Group have failed to cash in on the rebound. Their problems seem to swell with each fresh piece of news, while the problems afflicting Lloyds aregradually starting to shrink.
PPI will die
Lloyds2015 results showed a 5% rise in underlying profit to 8.1bn, or 10% excluding one-off losses from the sale of TSB. Underlying return on equity is now 15%, up from 13.6% in 2014. Impairment charges and operating costs both fell, while the common equity tier 1 ratio crept up 20 basis points to 13%. Lloydsmay have set aside another 4bn for PPI but management reckons that will be it, as City regulator the Financial Conduct Authority proposes a time bar onclaims. The largest UK misselling scandal of all time has cost Lloyds, the worst offender, a total of around 16bn.
IfPPI will soon be consigned tothe past, what of the future? One reason I tipped Lloyds is thatI like its relatively clear proposition: it aims to be a UK-focused, multi-brand bank targeting the retail and SMEmarkets. This looks far more appealing than the sprawling megalith banks of old, and should help its bossesmanagecosts and efficiencies within a low-risk business model.
Another plus is that Lloyds now has little need to build up its capital ratios, so can put its revenuesto more rewarding use. Investors are likely to reapthe rewards in the shape of special dividends and share buybacks. The rewards are already starting to flow, with afinal ordinary dividend of 1.5p andan additional special dividend of 0.5p, taking the total for the year to 2.75p. Forecasts suggests Lloydscould be yielding 5.4% by the end of this year, and 6.5% by December 2017.
Lloyds is the Iron Man of UK banking: itdashed itself to pieces after the financial crisis but is slowly rebuilding itself into the reliable incomemachine of old. Having learned its lessons, it should become the kind of low-risk proposition that every investor wantsin their portfolio. 2016has been volatile for Lloyds, but it has been volatile for us all. This is still my top blue-chip for 2016 and I reckon the best is yet to come.
There are other great top income stocks on the UK market today, and we at the Fool are particularly excited by this one.
While many leading UK companies are slashing their dividends, this FTSE 250 star accelerated its payout at astonishing speed in 2015.
You can find out which company we’re talking about bydownloadingour BRAND NEW report A Top Income Share from The Motley Fool.
The Fool’s crack team of analysts is so impressed by this company’s ambitious growth plans they’re happy to call it one of the best income stocks on the market today.
Click here to enjoy this FREE, no-obligation wealth report. It will be yours in moments and won’t cost you a penny.
Harvey Jones has no position in any shares mentioned. 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.