Shares in Lloyds (LSE: LLOY) last traded above 100p per share in September 2009. Since then a lot has happened to the bank, with it still being part-nationalised, having swung from major losses into a respectable profit, as well as reduce its cost base and improve its core asset performance so that it has a cost:income ratio of just 48%.
Its share price, though, is still lagging behind 100p and, although it made excellent gains of 61% in 2013, since then it has fallen by 7%. Furthermore, in recent months it has shown little sign of any upward movement and this has left many investors feeling rather disappointed with its performance.
Next year, though, is set to be a crucial year for Lloyds since it is expected to return to full public ownership (i.e. the government will no longer be a shareholder). This is likely to have a positive impact on the company’s share price because it will show the market that the bank is no longer in need of government support and, in time, could lead to improving investor sentiment towards the stock.
On this front, there is certainly scope for improvement. After all, Lloyds currently trades on a price to earnings (P/E) ratio of just 8.8 and this indicates that there is tremendous scope for an upward rerating. In fact, even if Lloyds’ P/E ratio was to rise to a still very appealing 11.9, it would be enough for its shares to trade at 100p.
In terms of potential catalysts to push its rating higher, Lloyds’ planned rise in dividends is likely to resonate well with investors at a time when interest rate rises are due to be slow and steady. Although the bank currently yields just 3.3%, this is forecast to rise to 5.2% in 2016 as Lloyds increases its payout ratio towards a rumoured 65% over the medium term. If this proves to be accurate then it could mean that Lloyds, in 2017 and beyond, will yield as much as 7%, which would be likely to cause income-seeking investors to bid up the company’s share price.
In addition, Lloyds is very much focused on the UK economy, which is likely to perform well in future years on a relative basis. For example, the Chinese economy is enduring a slowdown and Europe remains a slow-growth region. Although both of these areas have sound long term potential, the UK economy is among the fastest growing in the developed world and, with a very accommodative monetary policy, Lloyds’ profitability is likely to move upwards at a brisk pace in future years.
With the banking sector being hit hard by PPI provisions, the potential end to such claims over the next couple of years could also act as a positive catalyst on Lloyds’ share price. This, combined with the potential for fewer fines in the wider banking sector as legacy issues are reduced, has the potential to improve investor sentiment in Lloyds and also towards its banking peers.
So, while the last six years have been tough for investors in Lloyds, reaching 100p seems to be a very realistic goal which is likely to be achieved over the medium term.
