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How Lloyds Banking Group PLC Could Double Your Money By 2018

Do you have to invest in risky small-cap stocks to double your money? Not necessarily.

For example, FTSE 100 members Taylor Wimpey and Hargreaves Lansdown have risen by 55% over the last year.

I’ve been looking at the figures, and I reckon that there’s a real possibility Lloyds could double shareholders’ money within three years.

Lloyds is cheap

Shares in Lloyds Banking Group (LSE: LLOY) have fallen quite sharply from the 89p high seen back in May. Today, they are worth about 73p, or 18% less than six months ago.

These falls haven’t been caused by poor results. Lloyds’ interim results were very solid, and earnings forecasts for the current year have actually increased since May. So the fall must simply be due to market conditions and the ‘random walk’ of short-term share prices.

That’s good news for Foolish investors, as Lloyds looks much better value today than it was in May. Lloyds shares now trade at just 1.1 times their tangible net asset value, and have a 2015 forecast P/E of 9.1.

What’s more, Lloyds is expected to pay a total dividend of 2.4p this year, giving a prospective yield of 3.3%.

Double your money

Here’s how I think you could double your money by 2018.

First of all, let’s consider possible dividend payments:

Year

Dividend

2015 forecast final dividend

1.68p

2016 forecast

3.74p

2017 estimate

4.3p

2018 estimate

4.9p

Total

14.6p

I’ve estimated possible dividend payments for 2017 and 2018, assuming that Lloyds’ earnings per share rise gradually over the next few years. Any rise in interest rates, as now seems likely, should help the bank. A gradual end to PPI compensation payouts should also help lift profits.

My total dividend estimate of 14.6p already equates to a 20% return on the current share price, but what about the other 80%?

There are two elements to this, in my view, earnings per share and the bank’s valuation.

Earnings per share

Although current forecasts suggest that Lloyds’ earnings per share will fall slightly next year, I think it’s reasonable to assume that earnings will be higher in 2018 than in 2015.

This year’s forecast is for 8.1p per share, falling to 7.6p in 2016. I’ve pencilled in figures of 9p and 10p for 2017 and 2018 respectively.

Increased valuation?

At the bank’s 2015 forecast P/E rating of 9.1, earnings per share of 10p would give a share price of 91p.

However, I expect the current weakness in Lloyds shares to reverse once the government finishes selling its stake in the bank, which should be during the first half of 2016. The problem for investors at the moment is that there is a constant supply of new shares to the market.

Given Lloyds’ strong profitability and low price/book ratio, I think it’s reasonable to assume the bank’s valuation may also improve once this new supply is shut off.

A P/E rating of 12-13 seems possible to me. This would imply a share price of about 125p, based on my estimated 2018 earnings of 10p per share.

Once we add in my estimated 14.6p of dividends, that gives a total value of almost 140p, versus today’s 73p share price. That’s equivalent to a total return of 92%. Not quite double, I admit, but close enough for me!

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Roland Head 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.