Overall, I believe there is a lot of potential for the black horse of Lloyds Banking Group (LSE: LLOY) to ride forwards.
The dividend yield at the time of writing is a tasty 5.52%, comfortably above the FTSE 100 average, and is covered 1.71 times by earnings. There has been a consistent rise in the dividend since 2014, with the last three years seeing rises of 13.33%, 19.61% and 5.25%.
The bank’s price to net asset value currently stands at a bargain 0.8 while its common equity tier one ratio is an impressive 13.9%.
There is one key event, though, which I predict could see substantially more cash being distributed to share holders in dividends, which will soon be paid quarterly.
That is the end of PPI payouts, which is fast approaching on 29 August 2019. This can’t come soon enough for Lloyds, with the bank being forced to shell out £19.4 billion to date over the 16 million policies it sold since 2000.
In addition to this, there are signs of strength for the UK economy, which is of paramount importance to Lloyds. Unemployment is at a 43-year low and wage growth is reasonable. The end of the public sector cap gives scope for extra income to millions of households.
Customer service
It’s important to note that Lloyds still tops the tree for being the biggest provider of both mortgages and current accounts in the UK.
Lloyds’ customers are increasingly using the bank in a more digital fashion. As of 2018 there were 15.7 million active digital customers, a number that has been growing year on year. Over time, I believe this could lead to more branch closures, further reducing Lloyds’ costs.
Customer satisfaction, according to net promoter score – which is a measure of customer service at key touch points and the likelihood of users recommending Lloyds – was 61.8 in 2018, up from 61.2 in 2017. Complaints to the FCA per 1,000 accounts also dropped to 3.9 in the first half of 2018.
The ‘B’ word
The key issue for Lloyds, as with all UK-focused shares, is Brexit. I believe that eventually there will be some form of deal by 31 October 2019. There is a high probability Boris Johnson will be the next Conservative party leader, and the Brexit champion could be a better negotiator than Theresa May. The EU frequently leave deal-making decisions to the last minute, and they cannot afford to be without the UK payment of £39 billion.
So overall at a price of 58.16p at the time of writing I rate Lloyds a buy and will continue to hold the shares myself, as I believe there is a prospect of a decent capital gain, along with a solid dividend.
