Investor sentiment in Lloyds (LSE: LLOY) (NYSE: LYG.US) appears to have weakened somewhat in recent months. For example, shares in the part-nationalised bank have fallen by 12% in the last year alone and, while this may put off a number of investors, it makes shares in the company seem even more appealing.
That’s because the company’s valuation has inevitably come down, thereby offering more potential upside over the medium to long term. For example, Lloyds now trades on a price to earnings (P/E) ratio of just 9.1, which is far lower than the FTSE 100’s P/E ratio of 15.
An Improving Outlook
As recent inflation data has shown, the UK economy is some way off being at risk of overheating in terms of the current low interest rate environment causing price levels to soar. Far from it in fact, and with inflation at just 0.5% (and being on the cusp of falling to a negative number prior to the General Election due to savage oil price falls), there seems to be little prospect of an increase in interest rates in the short run.
This, of course, benefits the UK economy and, in particular, banks such as Lloyds. That’s because consumer, business and investor sentiment inevitably improves when interest rates are low and, when combined with positive real terms wage rises, it should mean that asset prices expand and demand for new loans increases. Furthermore, an improving UK economy also means fewer defaults on debt and less write downs for banks such as Lloyds.
A Sound Strategy
Clearly, Lloyds is in a much stronger position now than it was a few years ago. It has rationalised its operations and become far more efficient. Certainly, this has meant considerable short-term pain, including various one off restructuring costs, but it has left the bank in a far stronger position now. This should bode well for its future growth prospects and, even if the UK economy does hit the brakes in the medium term, Lloyds looks well positioned to continue to improve its profitability.
Looking Ahead
Investors in Lloyds, then, seem to have a lot to look forward to. And, to their credit, management seem to be keen to share any future success with shareholders and are in the process of increasing dividends per share at a brisk pace. For example, in the current year Lloyds is forecast to pay out dividends per share of 2.8p, with this set to rise to 4.3p next year.
At its current share price of 74p, this means that Lloyds could be yielding as much as much as 5.8% next year. And, with its profits on the up, this could easily increase significantly in 2017 and beyond. As such, Lloyds looks like a superb ‘buy’ at the present time.
