This 22% Potential Gain Makes Me Want To Buy Lloyds Banking Group PLC Today

Today is the first day of full trading for Royal Mail — and for many private investors, it will be the first day on which they can buy and sell Royal Mail shares. As I write, Royal Mail’s share price is up 2.5% on the day, at 487p — nearly 50% more than the postal giant’s 330p flotation price.

The success of the Royal Mail flotation has made me think seriously about buying shares in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US). The government sold a 6% slice of its 38% holding in Lloyds to institutional investors in the middle of September, and said it would not sell any more of its Lloyds shares for at least 90 days.

However, the next sale is expected to include an offering to retail investors. Given the outstanding success of the Royal Mail sale, my money is on a further Lloyds offering aimed at retail investors soon after the 90-day period is over — and I believe this could trigger a 22% gain for Lloyds shares.

Cheap income promise?

The enthusiasm with which institutional investors bought into the government’s first sale of Lloyds shares (which netted £3.2bn) suggests that they think the bank is attractively priced.

Lloyds is currently in talks with regulators about restarting dividend payments, and this is undoubtedly the big attraction for investors. According to the Financial Times, the bank’s CEO, Antonio Horta-Osorio, told investors at a recent meeting that he is hoping to pay out 70% of the bank’s earnings as dividends by 2015.

Based on the bank’s 2014 forecast earnings, that could mean a sector-best 6.1% prospective yield, at today’s share price.

22% upside?

Based on Mr Osorio’s dividend plans, I believe Lloyds shares offer the potential for a 22% gain at current prices.

Analysts’ consensus forecasts suggest earnings of 6.66p per share for Lloyds in 2014. If Lloyds was to pay out 70% of this in 2015 as dividends, then at today’s share price, Lloyds shares would offer a 6.1% yield.

This seems pretty high to me — currently, the highest yield on a high street bank comes from HSBC Holdings, which offers less than 5%. If we assume that Lloyds share price will gradually rise until its yield falls to 5%, then the shares could be worth 93p — 22% more than they are today.

As a result, I believe that investing in Lloyds today could deliver a healthy profit over the next 18 months.

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> Roland owns shares in HSBC Holdings but does not own shares in any of the other companies mentioned in this article.