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Why Lloyds Banking Group PLC Should Be A Winner Next Year

I’m taking a look at 2014 forecasts and prospects for some of our top companies, and today I’m drawn to the taxpayer-backed Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US).

Here’s Lloyds’ recent performance, together with current consensus forecasts for this year and next:

Dec Pre-tax EPS Growth Dividend Growth Yield Cover
2008 £760m 10.1p -65% 11.4p   18.2% 0.9x
2009 £1,042m 7.5p -26% 0p -100% 0% n/a
2010 £281m -0.5p n/a 0p n/a 0% n/a
2011 -£3,542m -4.1p n/a 0p n/a 0% n/a
2012 -£570m -2p n/a 0p n/a 0% n/a
2013* £3,760m 5.3p n/a 0.5p n/a 0.7% 7.6x
2014* £4,855m 6.8p +29% 2.3p 360% 3.1% 3.0x

* forecast

Now, it’s really not good seeing all those “n/a” entries when it comes to earnings and dividend growth, and there are too many noughts for comfort, too. Yes, those wilderness years were pretty painful — and though that pre-tax loss of £3.5bn in 2011 doesn’t come close to the eye-watering disaster that the Royal Bank of Scotland managed, it still hurts.

The loss was much reduced in 2012, and this year should see Lloyds back in profit. There’s also a dividend expected, although at just 0.5p per share it really won’t mean anything at this stage.

It’s not until next year that Lloyds should return to some semblance of normality, with profits starting to grow again and dividends returning to a reasonable yield of a predicted 3.1%.

So how has the share price fared? 

Well, we had the post-crunch slump, of course, but since late 2011 the shares have been picking up very nicely — we’re looking at a gain of around 60% over the past 12 months, and the price has more than trebled over two years!

Forecasts

What about that 2014 forecast — is it realistic?

Lloyds’ third-quarter update revealed underlying profit up 136% to £4,426m for the first nine months, with underlying profit for the quarter up 83% from the same quarter a year ago, to £1,524m.

Costs were reduced by 6% to £7,110m and impairments were down 44% to £2,483m. The bank also lifted its guidance, telling us to expect a net interest margin of 2.11% for 2013, up from the previous prediction of 2.1%. Non-core assets should stand at around £66bn with £26bn of that non-retail — and non-retail non-core assets should be reduced to around £15bn by the end of 2014.

Mortgage lending is picking up too, with house prices rising and the government’s Help to Buy scheme adding a nice boost.

The split into Lloyds and TSB has gone pretty well, and the government sold off some of its stake in September this year at a profit.

We’re really not far off Lloyds returning to full private ownership — and rather than throwing money away, it looks like UK taxpayers might have actually ended up with a reasonable investment.

Mis-selling

There are still likely to be stumbles along the way, as we heard last week when Lloyds was hit with a £28m fine by the Financial Conduct Authority for putting undue pressure on staff in a mis-selling scandal — the bank is likely to face compensation claims from victims of the practice.

But in reality, to a company forecast to make nearly £5bn in pre-tax profit in 2014, £28m isn’t even a slap on the wrist — it’s barely a tickle under the nose. And even if compensation should run into the feared hundreds of millions, it would still be only a relatively small shaving off that profit.

All in all, the 2014 outlook for Lloyds does not look at all overly-optimistic to me, and I wouldn’t be surprised to see things actually turning out even better.

Verdict: Returning to normality in 2014!

And finally...

Lloyds had a decent record of paying good dividends before the crunch, and it's headed back in that direction. If you want to learn how to identify great long-term dividends yourself, have a look at the new Motley Fool report "How To Create Dividends For Life", which gives you 5 Golden Rules for Building a Dividend Portfolio.

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Alan does not own shares in Lloyds or RBS.