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Lloyds Banking Group PLC Could Be Worth 125p!

Lloyds (LSE: LLOY) (NYSE: LYG.US) has made a disappointing start to 2015, with shares in the part-nationalised bank being down by 1% since the turn of the year. That’s a worse performance than the FTSE 100, which is up 5% year-to-date, and shows that investor sentiment in Lloyds remains relatively weak.

Income Potential

However, that could all be about to change due to Lloyds’ income potential. For example, the bank is forecast to pay out a dividend per share of 2.9p in the current year, followed by 4.2p next year. This puts Lloyds on a forward dividend yield of 5.6% and shows that it could have considerable income appeal over the next couple of years.

In fact, this appeal looks set to increase, as UK monetary policy seems likely to become even looser during the course of the year. That’s because the Bank of England has now stated that the UK could experience a period of deflation for the first time since 1960 and that it will consider lowering the interest rate in an attempt to inflate the economy. As such, dividend yields could become even more appealing for savers and income investors, thereby helping to push the share prices of high-yield stocks, such as Lloyds, even higher.

Valuation

As if that weren’t enough, Lloyds is set to increase its dividend even further after next year. That’s because it’s aiming to deliver a payout ratio of around 65% over the medium term and, were it to achieve this goal using next year’s forecast earnings figure, it would mean that Lloyds has a forward yield of a massive 7.3%, which would clearly be hugely appealing for any investor seeking a decent income.

With the FTSE 100 currently having a yield of just 3.2%, Lloyds could see its share price move higher as investors seek out such a generous yield. In fact, even if investors were to bid up the share price of Lloyds so that it reached 125p (a gain of 67% from its current share price), it would still mean that Lloyds has a forward yield of 4.4%. As such, a price target of 125p seems to be very achievable over the next few years.

Looking Ahead

Clearly, Lloyds faces an uncertain future, with the General Election only three months away, the Eurozone economy still facing major challenges, and the UK economy set to endure a tough period of deflation.

However, with profitability on the up and a dividend policy that is very generous, Lloyds could offer huge income potential that may see its shares become in-vogue and climb to reach the heady heights of 125p each.

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Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.