After posting a gain of 61% in 2013, it was always going to be difficult for Lloyds (LSE: LLOY) (NYSE: LYG.US) to deliver a similar level of growth in 2014. Indeed, with the FTSE 100 up just 1% in the year-to-date, there hasn’t been a rising tide to help propel Lloyds to higher highs, with the banking behemoth making next to no capital gains in 2014.
However, for shareholders in Lloyds, 2014 is proving that it could be a great long term play. Here’s why.
Improved Economic Backdrop
As has been reported recently, employment figures in the UK are extremely positive. For instance, unemployment fell to a five year low of 6.6% in April, with 780,000 jobs being added in the last year alone. This is the highest number of new jobs since 1989 and is yet more evidence that the UK economy is bouncing back from the desperate years of the recession.
This is great news for Lloyds because its strategy in recent years has been focused on increasing its exposure to the UK. It has done this through adopting a fairly common practice of selling off non-core assets that it felt required too much capital and that delivered too little reward in terms of profitability. Many of these non-core assets were abroad and so Lloyds has ended up being rather more UK-focused than it may have intended, with the result being that the bank is highly dependent upon the macroeconomic outlook of the UK.
Looking Ahead
So, with the UK now allaying fears that its recovery would prove to be a ‘jobless recovery’, it seems as though the medium to long term could be a bright one for Lloyds. Furthermore, the bank remains committed to targeting a very generous payout ratio in future years. Indeed, while the present yield of 1.8% is only around half of the FTSE 100 yield, in 2015 Lloyds is forecast to yield a very impressive 4.2%.
With interest rates looking set to remain at depressed levels over the medium term, a yield of 4.2% could attract buyers and help to push the share price of Lloyds to higher highs, thereby making up for what has been a rather subdued start to 2014. In addition, continued strength from the UK economy could provide a turbo boost to the bank’s bottom-line, too.
