The Pros And Cons Of Buying Lloyds Banking Group PLC

Today I am running the rule over banking colossus Lloyds (LSE: LLOY).

Dividends poised to explode?

The promise of chunky dividend payments over at Lloyds has kept investors glued to their monitors over the past year. The fruits of massive restructuring allowed the bank to get its payout policy back on track early last year, the first time dividends had been showered upon investors since part-nationalisation back in 2009. And the City expects payouts to trek markedly higher in the near-term at least.

Lloyds is expected to follow an anticipated dividend of 2.4p per share for 2015 with a 3.7p-per-share reward in the current period. As a consequence the yield blasts to an eye-popping 5.1% for this year, taking a prospective FTSE 100 average around 3.5% to the cleaners.

Capital concerns hang heavy

But for many these projections may appear too good to be true, particularly as chatter concerning further capital building requirements is still doing the rounds.

Lloyds successfully sailed through the Bank of England’s stress tests at the start of December, its CET1 ratio clocking in at 12.8% as of the end of 2014, and 9.5% under the bank’s theoretical ‘adverse’ conditions. Consequently Threadneedle Street did not recommend fresh cash raising at the firm.

But even though Mark Carney advised that “UK banks are now significantly more resilient than before the global financial crisis,” the Bank of England also advised it was “actively considering” raising the so-called ‘counter-cyclical capital buffer,’ i.e. money stored away by banks during the good times.

With Lloyds already facing fresh waves of turbulence from the already-embattled global economy, not to mention the prospect of more heavy penalties related to the mis-selling of PPI, further capital-building initiatives cannot be completely ruled out.

A divisive growth profile

Chief executive António Horta Osório’s transformation programme has quite-rightly been heralded as a roaring success, reining in many of the excesses of the pre-recessionary landscape by hiving off assets, slashing costs and placing an extra emphasis on Lloyds’ performance on the High Street.

But for those seeking exciting long-term growth prospects, Lloyds’ reduced footprint in foreign climes, not to mention withdrawal from profitable-yet-risky banking areas, is expected to weigh on earnings growth in the medium term at least.

Indeed, Lloyds is anticipated to report just a 3% bottom-line uptick for 2015, and an 8% slip is predicted for the current period.

Lloyds certainly lacks the exposure to emerging markets, for example, that can power profits at sector giants like HSBC skywards in the years ahead. But many of those concerned over the plight of Standard Chartered, a bank whose long-running woes in Asia are likely to worsen as continental heavyweight China’s economy cools, will be grateful of Lloyds’ domestic bias.

This year’s earnings forecasts leave Lloyds dealing on a P/E rating of 9.6 times, below the benchmark of 10 times that indicates exceptional value for money. For investors seeking a long-term banking selection at great prices, I believe the London firm could well fit the bill.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended shares in HSBC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.