5.1 Reasons That May Make Lloyds Banking Group PLC A Buy

Today I am detailing why I believe Lloyds Banking Group‘s (LSE: LLOY) (NYSE: LYG.US) improving earnings outlook is set to send shares heading higher.

Earnings ready to surge as transformation takes off

Shares in part-nationalised banking giant Lloyds Banking Group have crept relentlessly higher since mid-April, gaining more than 70% and striking their highest since November 2008 above 80p in the process. And I believe that an exceptional turnaround in the firm’s earnings power should drive shares still higher, starting with earnings per share of 5.1p pencilled in for 2013.

Lloyds has made stunning progress in its multi-year transformation plan, refocusing its efforts on its core UK markets and slashing its exposure to underperforming businesses overseas. The firm has remained extremely busy on the divestment trail and earlier this month agreed to sell its Australian businesses — principally its Capital Finance Australia asset finance and BOS International corporate lending arms — to Westpac Banking Corporation for £900m.

So City analysts are expecting Lloyds to print earnings per share of 5.1p in 2013, swinging encouragingly from losses per share of 2p in the previous 12-month period. And with a 29% advance forecast for 2014, to 6.6p, the banking behemoth’s growth prospects are certainly looking up.

Indeed, this earnings turnaround is expected to underpin stunning dividend growth for the long term. The company’s bailout by the UK government in the aftermath of the 2008/2009 banking catastrophe forced the firm to halt its dividend policy, and Lloyds is yet to hammer out a deal with Westminster over when — and to what extent — it can get shareholder payouts rolling again.

Still, brokers are optimistic that the bank will shell out its first post-crisis dividend this year, with a payment of 0.67p expected. And a resultant yield of 0.9% for 2013 is expected to leap to 2.9% in 2014 through a dividend of 2.2p per share.

For dividend guidance further out, Lloyds chief executive António Horta-Osório recent disclosure to investors makes for cheery reading. Following August’s half-year report, the bank’s head declared that the firm is looking to shell out 70% of the bank’s earnings in dividends within the next three years, according to a report in the Financial Times. If realised, this would smash the rest of the banking sector’s corresponding dividend ratios.

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> Royston does not own shares in Lloyds Banking Group.