Should You Buy Giant Lloyds Banking Group plc?

Lloyds Banking Group (LSE: LLOY) is one of the most popular stocks listed in London for institutional and retail investors. But does this mean that it’s a buy at 74p after an 8% fall in the last year?

After years of turmoil in the banking sector, it looks as if the industry is coming out of the other side. The end of PPI claims is a big step forward for the sector, having cost an estimated £27bn so far. The FCA has outlined a plan to finish costly PPI claims in 2018, but there is still an estimated £2bn in PPI charges for Lloyds before the deadline. Even though Lloyds faces another hefty bill before the deadline, it will finally draw a close to the PPI years. This will allow banks to breathe easier knowing that there will be no more costly payouts to come. 

Lloyds has positions in many market sectors that remain profitable, and has a wide range of subsidiaries that have excellent growth potential in the next five years. If we look at the key numbers at the moment, Lloyds looks slightly undervalued but importantly has potential for growth.

Lloyds returned to the dividend game this year and paid a yield of 1.5%. Surprisingly, one fund manager expects the yield to grow to 4.5% next year and then to a huge 7% in 2017. Alex Wright, manager of two Fidelity Funds, said that “the cash generation of the company is very high”. He also states that there are political concerns about dividend increases, but economically the bank has the ability. This is an interesting take on the company from a well-known fund manager, which adds weight to the investment case. 

Tuesday brought news that Lloyds and all other UK banks passed the new ‘stress test’. Lloyds said that “The Group exceeds the capital and leverage thresholds set out for the purpose of the stress test”. This is good news for the wider UK banking sector, and Lloyds shares responded by rising 2.4% during the session. The company has said that the strong UK economy has underpinned the business model, and the company will continue to generate strong returns well into the future. 

It’s also looking more likely that there will be a rate rise at the start of next year (February is a popular choice for many market commentators). This will immediately help Lloyds due to the increase of net interest margin, and will mean Lloyds is generating more interest which in turn should drive growth skywards.

The banking sector hasn’t been a good area for investment for some years now. However, I believe that the sector is beginning to look better, and the next year may be the first year of real growth across all banks. Lloyds, in particular, is well positioned for growth, and is backed up by a nice dividend yield of 1.5% — which could rise up to as much as 4.5%. 

Overall Lloyds offers good growth potential for buyers at 74p, and over the next 12-24 months should see the share price move back towards that elusive 100p. 

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Jack Dingwall has no position in any shares mentioned. 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.