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3 Great Reasons Why Lloyds Banking Group PLC Is Set To Take Off

Today I am looking at why I believe Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is an excellent stock in which to deposit your cash.

Transformation scheme paying off handsomely

Lloyds is a long-standing high-street heavyweight, and the company’s strategy of re-concentrating its efforts on its core UK businesses while shedding operations overseas is a key plank in its recovery story.

Combined with an ambitious cost-reduction drive and shake-up of its products and services, the bank saw underlying profit surge to £2.9bn in January-June from £1.04bn in the corresponding period last year. I believe that Lloyds’ repositioning as a “low risk, highly efficient UK retail and commercial bank” has much further to run, with new customer propositions and its rolling expense-cutting drive set to keep earnings ticking higher.

Streamlining strategy continues to deliver

Lloyds continues to make excellent progress in its bid to hive off its non-core assets and boost the balance sheet. Indeed, the bank is looking good to reduce its non-core assets to £70bn by the end of the year, a full 12 months ahead of schedule.

The bank announced in August that it had sold its Heidelberger Lebensversicherung German life insurance business to Cinven Partners and Hannover Rück for a cash consideration of approximately £250m. As well, the bank sold off a portfolio of leveraged loans to a subsidiary of Goldman Sachs for around £254m. The funds will strengthen the firm’s financial position as well as help it to achieve its core tier 1 capital ratio goal above 10% by the close of 2013.

Earnings recovery to get dividends back on track

And the City’s analysts expect the company’s solid turnaround strategy to result in a steady earnings turnaround for the medium term. Indeed, losses of 2p per share in 2012 are anticipated to bounce to  earnings per share of 5.1p in 2013 before striding a further 30% next year to 6.6p.

This projected earnings turnaround leaves the company in a good financial position to resume dividend payments, and the semi-nationalised bank plans to hammer out a deal with regulators over both the timing and conditions of making future shareholder payouts.

Still, analysts expect the company to shell out its first dividend since the 2008/2009 geo-financial crisis this year, with a dividend of 0.7p per share carrying a yield of 0.9% at current prices. But dividends are expected to rev higher from next year onwards, with a payment of 2.4p per share resulting in a 3.1% dividend yield. And I expect dividends continue moving markedly higher in line with earnings growth.

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> Royston does not own shares in Lloyds Banking Group.