The Bank of England this week cut its forecast for UK economic growth to 1.9%, from 2%, and warned of reined-in consumer spending as inflation starts to bite while wages stall.
Our banks are also still on uncertain ground as we head towards our exit from the European Union in a couple of years, so we should expect to see Lloyds Banking Group (LSE: LLOY) shares remaining under pressure until we’re out, shouldn’t we?
Well no, I don’t think so, and on top of continuing to rate the shares as undervalued, I see a couple of events that could well give them the kick they need to give them a boost. With a slow but steady rise of 13% over the past six months, to today’s 69p, I reckon there’s some held-back momentum there just waiting for a shackle or two to be thrown off.
Government stake nearly gone
One of those shackles is the government’s remaining stake in Lloyds, and while it’s slowly been sold off it provides an artificial balance between supply and demand and keeps the price down. When it’s all gone, investors wanting to buy Lloyds will have to get their shares from others who are less keen to dump them.
But now, all that’s left of the taxpayers’ ownership is a tiny stake of around 0.25%, which chief executive Antonio Horta-Osorio suggested at the firm’s AGM on Friday could be totally disposed of within the next few days.
Political uncertainty has also surely been holding our banks back, with a risk that the government’s small majority in parliament could be held hostage by extreme eurosceptics on the back benches and by those still clinging to their last hopes that Brexit might actually be avoided.
A big Conservative win in the upcoming general election would put paid to that risk, and allow the moderate mainstream of the party to try to get the best exit deal we can. Now, I never thought I’d be cheering for a Tory victory, but the UK’s economic position is by far the most important issue facing us right now — and an economy- and business-focused government is surely what we need.
Irresistible dividends
What I think should make Lloyds more attractive than most banks is its recovering dividend and its strongly progressive dividend policy. Pre-tax profit is expected to exceed £7bn this year, and that should happily support a forecast dividend yield of 5.3% — and with the bank’s payout ratio expected to rise, analysts think we’ll be seeing better than 6% by 2018.
Another thing that makes me feel bullish stems directly from Lloyds’ disaster and its bailout. It forced the bank to fundamentally rethink itself, from the roots upwards, in a way that rivals that avoided going cap-in-hand to the taxpayer did not have to do.
The result of that shows, with Lloyds now boasting the lowest cost-to-income ratio of the big high street banks, and it’s expected to be lowered further in the next couple of years. And Lloyds’ CET1 ratio of 14.3% is up with the very best too.
The City’s analysts are getting behind Lloyds too, with a pretty strong buy consensus out there now and the bulls targeting 75-8p in the short term. With Lloyds shares on a forward P/E of only around 10, I’m firmly in the buy camp too.
