MENU

3 Things That Say Lloyds Banking Group PLC Is A Buy

LloydsAhead of first-half results due on 31 July, what is Lloyds Banking Group (LSE: LLOY) looking like?

Its share price has been a bit erratic and has fallen back from a January peak of 87p to today’s 75p, but that still represents a modest 10% rise over the past 12 months while the FTSE 100 has only managed 4%.

For a bank that’s hoping for a strong recovery, it’s not a great vote of confidence. But if the market doesn’t seem sold on Lloyds right now, I think that’s a mistake. Here are three reasons why:

1. Profit

Lloyds was back in profit in 2013, though only just, and at the time people could be forgiven for wondering if it really represented a turning point.

But in May, Lloyds reported a 22% rise in underlying profit to £1,800m for the first quarter of the year with a statutory pre-tax profit of £1,369m. That was backed by a 10% rise in net interest income, a 5% reduction in costs, and a slashing of impairments charges by 57%. And the bank’s fully loaded CET1 ratio perked up to 10.7% from 10.3% at December 2013.

Analysts are forecasting a pre-tax profit of £5.9bn for the full year, and it’s looking increasingly likely that will be met. There’s also a figure of £7.4bn suggested for 2015. Lloyds’ profit is back and here to stay.

2. Dividends

A bank that doesn’t pay dividends isn’t much of a bank really, and working towards a resumption of its annual cash handout is precisely what Lloyds is doing. It must request permission from the Prudential Regulation Authority to do so, and that august body will have some strict ideas about the capital measures Lloyds will have to satisfy. But capital ratios are strong and getting better, and Lloyds says it will seek to resume dividends in the second half of this year.

Should it succeed, it’s likely that the full-year yield will be less than 2%. But analysts are already forecasting 4.3% for next year.

3. Low valuation

On today’s price, Lloyds shares are on a forward P/E of only 10 for year-end, and that would drop to just 9.3 based on 2015 forecasts. That’s cheap compared to a FTSE average of 14, but it looks even cheaper compared to its nearest rival, Royal Bank of Scotland. RBS has already announced a pre-tax profit of £2,652 million for the first half of this year, ahead of the actual results day, and there’s around £4.5bn forecast for the full year. That’s good, but it puts RBS on a forward P/E of nearly 15, which is half as much again as Lloyds.

Other banks are on low P/E multiples too, but Lloyds’ recovering growth prospects have to make the shares cheap, don’t they?

If you're looking for more great long-term investments for your portfolio, you should have a read of "The Fool’s Five Shares To Retire On" report. They're all similarly big and safe companies, and between them provide a nicely balanced selection.

The report is completely free, so click here to get your copy today!

Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.