Lloyds Banking Group plc is a top Neil Woodford stock I’d buy for retirement now

Lloyds Banking Group plc (LON: LLOY) could be a strong long-term share due to its improving performance.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The half-year results released by Lloyds (LSE: LLOY) on Thursday showed that the company is making progress despite legacy issues. For example, it has been able to grow profit by 4% versus the same period of the prior year. With Neil Woodford recently purchasing the company and its valuation continuing to be low, now could be the perfect time to buy it for the long run.

Legacy issues

As with a number of its sector peers, Lloyds continues to experience challenges caused by legacy issues. For example, it has now set aside a further £1bn to cover the cost of insurance mis-selling and the treatment of mortgage customers. Of this £1bn, around 70% will cover payment protection insurance (PPI) claims, while the remainder is set to be used to repay almost 600,000 mortgage customers.

While disappointing, the provision is not wholly unexpected. In the long run, such costs are likely to gradually fall and leave the bank with greater capital to reinvest or pay out to investors as a higher dividend.

Improving performance

Despite its legacy issues, Lloyds continues to make progress as a business. It has increased statutory profit by 4% to £2.5bn, while underlying profit is 8% higher at £4.5bn. This shows that once the PPI scandal and compensation payments to small business owners and mortgage customers are over, there could be a strong business in place.

Part of the reason for the company’s improving profitability is its ability to continually cut costs. While a number of other UK banking companies have seen their operating costs rise since the credit crunch, Lloyds has been able to reduce them in order to generate a sector-leading cost-to-income ratio of 45.8%. As well as this, its 4% increase in total income shows that it is benefitting from a rising top line too. With forecasts for the full year being maintained and further increases in loans and advances expected following the acquisition of MBNA, the outlook for the company is relatively bright.

Investment potential

The improved financial performance from Lloyds means that a higher dividend is becoming a reality. Dividends per share were increased by 18% for the first half of the year. This is in line with plans to raise them by 53% for the full year. This puts the company’s shares on a forward dividend yield of 5.8%, which is more than twice the current rate of inflation.

Although a fall in earnings of 2% is forecast for next year, a wide margin of safety suggests that the risk/reward ratio remains favourable. Lloyds has a price-to-earnings (P/E) ratio of just 9.4, which indicates that the potential for capital growth remains high. Certainly, more legacy issues seem likely over the coming years. But with improving performance, a high yield, wide margin of safety and sound strategy, now could be the perfect time to buy it for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »