Market turbulence to start the year led George Osborne to postpone the government’s sale of its final stake in Lloyds Banking Group (LSE: LLOY) as shares of the bank are off 16% since the end of 2015. The resumption of dividend payments and the relative strength of the domestic economy should have seen shares trending the opposite way, so what has happened? One factor is the expectation that Lloyds will set aside a further £2bn to £3bn to address PPI claims when it announces full-year results later this month. Another issue was the Bank of England’s decision to not hike interest rates for the foreseeable future, which would have allowed Lloyds to increase net interest margins considerably.
However, the sell-off of shares to begin the year may have created another great opportunity to begin a position in Lloyds. The bank has successfully reoriented towards a focus on the domestic market and reduced risky holdings while simultaneously building up sufficient capital buffers to satisfy regulators. Combined with the potential end to PPI claims as early as 2018, profits will increasingly be returned to shareholders. Analysts are already forecasting a 5% dividend yield for the next fiscal year and capital returns to shareholders should only increase in the future. Shares are currently priced at a mere eight times next year’s forecast earnings and their price/book ratio is 0.9. With dividends set to rise progressively alongside increased profits, I believe investors would do well to consider buying Lloyds at this bargain price.
Winning share?
Pharmaceuticals giant GlaxoSmithKline (LSE: GSK) has so far resisted activist investor calls to break up the business and last week posted solid, if not spectacular, results for the past year. Revenues rose by 4% and earnings per share trebled due to asset sales during the year. These results should dampen talk of an imminent dividend cut and provide time for CEO Sir Andrew Witty to continue his transformation of the business from a pure drug maker to a provider of consumer health goods, vaccines and drugs alike. This pivot has allowed GSK to avoid spending billions on potential new drugs as Shire and AstraZeneca have been forced to. It will also ensure less-lumpy revenue streams, and provide greater market share in developing country growth markets. Shares are currently forecast to provide a 6.2% dividend yield for this year and trade at 16 times earnings. While not a bargain, this fantastic dividend and safe growth prospects lead me to believe GSK could be a winning share for investors.
Take a closer look
Shares of tobacco giant British American Tobacco (LSE: BATS) were off 5% last week, which I believe has created another great opportunity to buy into a long-term winner. While the cigarette market will grow little over the coming decades, BAT has proven time and time again its ability to increase profits while overall volume is flat. Operating margins are now at a stunning 39.2%, showing how much pricing power BAT holds. Furthermore, the company returns significant cash to shareholders through a 4.1% yielding dividend and some analysts are predicting organic profit growth as high as 6% for the coming year. While the shares aren’t exactly cheap, priced at 16 times this year’s earnings, BAT offers steady growth and a solid dividend. That’s reason enough for investors to take a closer look at this share.
