Shares in Lloyds (LSE: LLOY) have risen by around 20% in the last month and looking ahead, appear to offer significant upside potential. That’s largely because the part-nationalised bank continues to trade on a highly appealing valuation, with its shares having a price-to-earnings (P/E) ratio of just 9.5. With the FTSE 100 having a P/E ratio of around 13, this indicates that Lloyds’ share price could rise substantially and still be viewed as inexpensive next to the wider index.
In addition, Lloyds offers excellent income prospects. While its business model may lack the stability and resilience of a utility or consumer goods company, Lloyds makes up for this with an exceptionally high yield. In fact, in the 2016 financial year it’s expected to pay dividends of 3.9p per share and this equates to a yield of around 5.4% at its current share price level. And with Lloyds forecast to increase shareholder payouts in 2017 and beyond, it could become an even more appealing income stock over the medium term.
Uncertainty to end?
With the government deciding to push back the date of the disposal of its stake in Lloyds, it has led to increased uncertainty for the bank and its investors. Once the share sale has been completed, it could lead to greater clarity regarding the bank’s future to enable it to get on with being a profitable business, rather than a part-state-owned entity. This could help to improve investor sentiment in Lloyds and show the market that it has well and truly left behind its problems from the credit crunch.
On this front, Lloyds has made multiple asset disposals, reduced its cost base and streamlined its operations so as to become a much leaner and more profitable business in recent years. Clearly, it has benefitted from an improving UK economy and the growth in house/asset prices as well as a loose monetary policy that has created favourable operating conditions. Looking ahead, the prospect of a Brexit could peg back returns in the short run, but with policymakers seemingly unlikely to raise rates at a rapid pace, Lloyds could continue to grow its earnings with the aid of an economic tailwind.
A good mix
Although a number of other UK-listed banks also offer excellent value for money and seem to be worth buying for the long term, Lloyds seems to have the perfect mix of recovery potential and stability. On the one hand, there’s scope for it to benefit from continued improvements to its business model as well as improved investor sentiment from the sale of the government’s stake.
However, it also offers a degree of stability, with its bottom line being healthy (as evidenced by its forecast dividend payouts) and it having become a highly efficient business in recent years. As such, even among a sector that offers exceptional long-term total return potential, Lloyds stands out. Therefore, it seems to be a compelling buy.
