Last week I suggested that, after a year of muted share price movements, Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) could soon roar back into life.
I’m not the only one feeling bullish. Two brokers have added their voices to the growing chorus that reckons the best is yet to come from recovering Lloyds.
Judge Jefferies
On Tuesday, Jefferies upped its Lloyds rating from hold to buy, and hiked its target price from 88p to 102p.
It said investors are hungry to invest in shares of banks that have de-risked, are returning capital, have positive earnings momentum and are easily understood. Lloyds scores on all counts.
Trading at 81p at time of writing, that suggests a 25% share price uplift if Jefferies is proved correct.
Capital Progress
Jeffery’s isn’t the only broker bidding up the stock. JP Morgan weighed in next day, claiming that Lloyds’ strong capital progress holds out the prospect of handsome dividend payouts and future cash returns.
It calculated that the dividend could rise to 5.3p per share by 2017, which would give a yield of 6.4% at today’s price.
And there’s also the potential for a special dividend or share buyback.
JP Morgan named Lloyds its top UK bank pick, attracted by a 2016 price/earnings ratio of 9.1 times.
Tough Challenge
So what do I think? I reckon Lloyds’ increasing focus on the UK retail market is both a blessing and a curse.
Strategically, I’m glad it is sticking to the market it knows best, and is working hard to cut costs and expand its digital operation at the expense of its pricey branch network.
But I think UK retail banking could be in for a choppy few years, especially lending, because rampant house price growth can’t last forever, and consumers are already piling on more debt than is healthy, both secured and unsecured. That could hurt when rates finally rise.
Lloyds is also facing tough competition from the challenger banks, at a time when customers are less willing to stick with the same bank for life.
Regulatory penalties and banking levies will also nibble away at banking dividends.
Raging Bull
On the plus side, Lloyds has just posted a hefty 21% increase in first-quarter underlying profits. By simplifying its operation, its balance sheet will be easier for investors to understand.
There are disadvantages to confining yourself to a mature market, but one big advantage. Rather than chasing growth, management can return more of the profits to shareholders in the shape of dividends and buybacks.
Lloyds look like one of the more solid prospects on the FTSE 100 today.
No wonder the bulls are running again.
