The Pros And Cons Of Investing In Lloyds Banking Group PLC

Making stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

Legal battles drag on

Like many within the British banking sector, Lloyds remains embroiled in the long-running scandal concerning the mis-selling of payment protection insurance (PPI).

The bank announced in last month’s interims that it had incurred an additional £750m charge during July-September, and although the number of complaints continues to drop, this is not as occurring as quickly as hoped. With Lloyds also facing claims for mis-selling interest rate hedging products and LIBOR-fixing, fines from the regulator could continue to clock up.

Profits pound higher

Still, the company has proven far more successful in addressing other legacy issues and has created a more streamlined, earnings-generating beast — Lloyds’ ambitious restructuring drive helped to push core underlying profit 20% higher during January-September, to £5.55bn, last month’s interims showed.

Not only are the firm’s cost-cutting initiatives, which are running comfortably ahead of schedule, helping to drive the bottom line, but the bank’s divestment scheme is also helping to deliver plump earnings. Indeed, Lloyds announced just this week that it had successfully spun off its Scottish Widows Investment Partnership division to Aberdeen Asset Management for up to £650m.

Better value elsewhere?

Although Lloyds’ transformation package appears to be delivering the goods, it could be argued that bank-hungry investors can find better value elsewhere.

Lloyds currently deals on a prospective P/E rating of 14.3 currently, comfortably above a corresponding reading of 11.7 for HSBC Holdings and 10.6 for Barclays. Not only do these entities offer excellent earnings potential well into the medium term, but shareholders can also expect chunky dividends to be forked out.

Exceptional dividend prospects

Indeed, for investors one of the biggest questions hanging over Lloyds is when the semi-nationalised bank will once again be permitted to stat shelling out dividends. Still, City analysts are broadly optimistic that payouts are set to ignite over the next 12 months.

Forecasters expect Lloyds to pay out a dividend of 0.6p per share in 2013, a payout that translates to a 0.8% yield at current share prices. But for next year the dividend is anticipated to leap to 2.2p per share that, if realised, carries a much-improved 3% yield.

An appealing share selection

And in my opinion a perky earnings outlook should have the knock-on effect of driving the dividend higher in coming years. I believe that with further savings to be achieved through its transformation plan, coupled with steadily rising revenues across the group, the firm offers both exciting growth and dividend prospects.

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> Royston does not own shares in any of the companies mentioned in this article.