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Should I Buy Lloyds Banking Group PLC?

I’m shopping for shares again, so should I pop Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) into my basket?

Bad bank comes good

Lloyds Banking Group’s stonking 151% share price rise over the last 12 months prompts me to ask myself two questions. First, why did I sell it 18 months ago? And second, how long can it sustain this growth trajectory? These questions inevitably lead to a third: should I buy Lloyds today?

Nothing succeeds like success, as Lloyds’ expectation-beating interim 2013 first-half results confirm. The bank posted a statutory profit of £2.13 billion, compared to a loss of £456 million in the first half of 2012, pushing up the share price 8% in a day.

Lloyds could boast progress on all fronts, including a 178% leap in group underlying profit of £2.9 billion, a 6% cut in costs to £4.74 billion, a 43% cut in bad debt charges to £1.81 billion and a healthier core tier 1 capital ratio of 13.7%, up from 12% in December. To add to investor excitement, Lloyds also said it plans to speak to regulators about resuming its dividend.

Pain and gain

Last time I looked at Lloyds in this series, in October 2012, I admired the way it was simplifying its sprawling operation, ditching non-core operations and exiting 17 countries. But I said it was too painful for me to buy at 42p, given that I sold at 28p. My pain has only intensified, however, as Lloyds now trades at slightly above the government’s bailout price of 73.6p. This has fired up speculation over how and when Chancellor George Osborne will start offloading the taxpayer’s stake in the bank.

The likeliest option is a swift institutional placing followed by a heavily hyped public offering, at some point before the May 2015 election. The assumption has been that this will knock the share price, but now I’m not so sure. By raising public interest, and sending out the signal that the bank is returning to normality, it could underpin the price (although Barclays‘ recent cash call might dilute investor demand for banking stocks). What would really help is a return of Lloyds’ sorely missed dividend, and that day is edging closer.

I sold Lloyds because I am an investor, rather than a trader. Lloyds has been a trader’s delight, but is it a good investment? The Share Centre’s Profit Watch UK suggests otherwise, showing us that “the banking sector was one of the poorest performers in terms of revenues in 2012 due to weak lending, and write-downs pushed profits down further seeing the sector contributing to £7.7bn of the UK’s profit decline of £25.6bn”.

Lloyds still has a long way to go to achieve financial health, while PPI compensation, Libor fixing and the interest-rate swaps mis-selling scandals cast a shadow over its moral well-being. But Lloyds is inching towards respectable investment status again, as it pays down debts, plumps up its capital cushion and pushes to resume that dividend.

Instant income

Even at 74p, Lloyds remains a long way from its pre-crisis high of around £6 (don’t get excited, it will be years before we get there). But I have been betting against it for too long. You can buy it today, or see what the Chancellor has up its sleeve. Either way, this is a stock you should have and hold for the long-term.

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> Harvey doesn’t own shares in any company mentioned in this article.