Why Lloyds Banking Group PLC Should Be A Candidate For Your 2014 ISA

Things can only get better for Lloyds Banking Group PLC (LON: LLOY).

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LLOYWhen it comes to your annual ISA allowance (which will be going up to £11,760 this April), you might thing that any good investment will do for it.

But I reckon that, with tax savings that could save you a lot of money over a decades-long horizon, an ISA is best used for “long-term buy and forget” shares — the kind that you think will be fine if just left alone until the day you retire.

Forget Lloyds?!

Now, you may not think Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is the kind of company that it would be wise to forget, especially not after its crash and bailout during the credit crisis.

But the kind of events that happened in 2008-2009, well, they’ll badly affect most investments in shares. And I reckon that if you’d invested a little every year in Lloyds, all through the crash, you’ll still end up nicely ahead in another 20 years.

The other thing is that our banks are in much better shape now than they have been for years, with all of them well on the way to satisfying their requirements for beefed-up capital positions. I’m not saying banks won’t be naughty again, and if they are then it will surely be in unforeseen ways — but if any time is the time to invest in banks, it’s surely now.

Buy the bailouts

Why Lloyds specifically?

Well, we’ve seen some eye-watering losses, peaking with that pre-tax loss of £3.5bn in 2011 (albeit dwarfed by Royal Bank of Scotland‘s total losses of £24bn in 2008 — the UK’s biggest corporate loss ever, by far). And there hasn’t been a penny in dividends paid since the crisis started to unfold.

But for the year to December 2013, Lloyds was actually back in the black, reporting a statutory pre-tax profit of £415m — although the bank claimed an underlying profit of £6,166m, with various legacy items lopping off nearly £3.5bn amongt other one-offs.

Dividends coming back

The company also told us it will soon be set for dividends again, and expects to apply to the Prudential Regulation Authority to resume paying them in the second quarter of 2014 — at the time, Lloyds said it envisages a progressive dividend policy “moving to a dividend payout ratio of at least 50 per cent of sustainable earnings in the medium term“.

On the current share price of around 82p, we’re likely to be seeing a yield of around 2% for 2014, and that should rise to 4.1% for 2015 — by which time we should hopefully be seeing pre-tax profit of more than £7bn. That’s considerably ahead of RBS’s likely schedule for a return to dividends, and Lloyds is also valued on a lower price to earnings (P/E) multiple than RBS — approximately 11 on 2014 forecasts, dropping close to 10 by 2015.

Good timing is a bonus

Now, I’m not a great proponent of trying to time ISA investments — my approach is to just buy good companies, providing they’re not too expensive.

But I reckon we’re looking at a nice price opportunity now, and I think some of your ISA allowance dedicated to Lloyds is very likely to reap rewards.

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.

Alan does not own any shares in Lloyds Banking Group or Royal Bank of Scotland.

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