Suffice it to say, 2015 hasnt been a great year for Lloyds (LSE: LLOY) andthe banks share price performance reflects that. Its fallen6.5% since the turn of the year and thats after 2014 was alsoa poor year for Lloyds when its shares declined 4%. Investors could be forgiven for anticipating yet another tough year ahead for the part-nationalised bank.
But that could be a mistake. Inthe last couple of years Lloyds has been making gradual improvements to its business thathave set it up for excellent long term performance. Itdisposed of non-core assets where it felt the risk/reward ratio on offer wasnt appealing and this has allowed it to concentrate on developing its core assets and generating efficiencies from them. With Lloyds having a cost:income ratio of just 48% in its recent third quarter results, its clearly moving in the right direction following major job losses and cost-cutting initiatives.
Although tough in the short run, such changes to Lloyds business model have returned the bank to profitability. And with the governments stake gradually being sold down, its clear Lloyds is almost ready to live without state aid. This process is set to be completed next year when Lloyds is offered to the public at a 5% discount to its market price and with the promise of a free share for every 10held for at least one year.
Such an offer is likely to stimulate demand for Lloyds shares next year and with the bank trading on a price to earnings (P/E) ratio of just 8.5, theres tremendous scope for an upward rerating in 2016 and beyond.
Additionally, Lloyds is benefitting from an improving UK economy and even thoughinterest rate rises have the potential to act as a brake on the macroeconomic outlook, the reality is that theyrelikely to riseat a very slow pace. In fact, with the price of oil falling and pushing inflation lower, the Bank of England has little scope for anything more than a token rise in interest rates at the present time. This should help to stimulate demand for new loans as well as making life easier for those individuals and businesses needingto service their existing loans.
As well as the potential for rising profitability, Lloyds dividend potential is likely to convince many investors that its a worthy purchase in 2016. Lloyds may only yield 3.4% at the present time but its expected to yield 5.2% in 2016 and with a rumoured payout ratio goal of 65% over the medium term, dividends could rise at a rapid rate. This, combined with a continued low interest rate, could make Lloyds one of the most in-demand income stocks in the FTSE 100.
So while the last two years have been disappointing for Lloyds, in 2016 its set torule the FTSE 100. After all, with a higher yield, lower valuation and brighter growth prospects than the index it looks likea sound long term buy at the present time.
Despite this, there’s another stock thatcould outperform Lloyds next year. 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.