After tipping Lloyds Banking Group (LSE: LLOY) as my top stock for 2016 it was inevitable that it would begin the year with a loud crash. It opened at 72p per share in January but one month later had plunged 20% to just 57p, and I bet you wish you had bought it then.
Blame game
You can’t keep a good company down and the Lloyds share price has since rebounded 26% to recapture its starting price of 72p, making it the poster boy for those who like to buy on the dips. Lloyds was still a good company when it crashed in January, it was the blameless victim of a wider collapse in sentiment. It looks an even better company today, which is why it has rebounded so strongly.
It’s interesting to note that stricken rivals Barclays and Royal Bank of Scotland Group have failed to cash in on the rebound. Their problems seem to swell with each fresh piece of news, while the problems afflicting Lloyds are gradually starting to shrink.
PPI will die
Lloyds’ 2015 results showed a 5% rise in underlying profit to £8.1bn, or 10% excluding one-off losses from the sale of TSB. Underlying return on equity is now 15%, up from 13.6% in 2014. Impairment charges and operating costs both fell, while the common equity tier 1 ratio crept up 20 basis points to 13%. Lloyds may have set aside another £4bn for PPI but management reckons that will be it, as City regulator the Financial Conduct Authority proposes a time bar on claims. The largest UK misselling scandal of all time has cost Lloyds, the worst offender, a total of around £16bn.
If PPI will soon be consigned to the past, what of the future? One reason I tipped Lloyds is that I like its relatively clear proposition: it aims to be a UK-focused, multi-brand bank targeting the retail and SME markets. This looks far more appealing than the sprawling megalith banks of old, and should help its bosses manage costs and efficiencies within a low-risk business model.
Capital investment
Another plus is that Lloyds now has little need to build up its capital ratios, so can put its revenues to more rewarding use. Investors are likely to reap the rewards in the shape of special dividends and share buybacks. The rewards are already starting to flow, with a final ordinary dividend of 1.5p and an additional special dividend of 0.5p, taking the total for the year to 2.75p. Forecasts suggests Lloyds could be yielding 5.4% by the end of this year, and 6.5% by December 2017.
Lloyds is the Iron Man of UK banking: it dashed itself to pieces after the financial crisis but is slowly rebuilding itself into the reliable income machine of old. Having learned its lessons, it should become the kind of low-risk proposition that every investor wants in their portfolio. 2016 has been volatile for Lloyds, but it has been volatile for us all. This is still my top blue-chip for 2016 and I reckon the best is yet to come.
