Why Lloyds Banking Group PLC Is A Perfect ISA Investment

The nature of the ISA wrapper means that it’s more advantageous to hold some types of investments in the wrapper than others. The best ISA investments are those companies that have a competitive advantage over peers, a bright long-term outlook and have the potential to return plenty of cash to shareholders via dividends or buybacks.

Lloyds (LSE: LLOY) has all of these qualities. Indeed, the bank is one of the largest retail banks in the UK with a leading position in the UK mortgage market. And nearly 10 years after the financial crisis, Lloyds has restructured and recapitalised itself to the stage where it’s now one of the most efficient, and well capitalised large banks in the developed world.

A bad start

Shares in Lloyds started the year on the back foot, slumping by a fifth to 58p on growth concerns. However, after the group released its full-year 2015 results at the end of February, the bank’s shares rallied as the results confirmed what many analysts were already saying; Lloyds’ underlying business remains relatively healthy.

Lloyds’ tier 1 capital ratio now stands at 13.9%, a level the majority of the bank’s European peers can’t match, which gives management plenty of options. For example, with a robust capital base already in place, management has already stated that the bank could return a total of £25bn to investors over the next few years via buybacks and special dividends.

Lloyds is already making good on this forecast. The bank surprised investors when it announced a special dividend of 0.5p per share, on top of the expected ordinary dividend of 2.25p declared alongside full-year results. The 2.75p total payout gives a healthy 3.3% yield at current prices.

Moreover, next year analysts expect the bank to return around 5p per share to investors for a yield of 7.3%.

A UK bank

Lloyds’ full-year 2015 results confirmed the bank’s position as one of the most profitable and well-financed of all the big UK banks. Lloyds reported an underlying profit before tax of £8.1bn for the full year, up from £7.8bn in 2014 while its underlying return on equity rose from 13.6% to 15%. Further, Lloyds’ costs only accounted for 49.3% of the bank’s income.

Still, if you’re looking for growth, Lloyds may not be the stock for you. During 2015 Lloyds’ mortgage lending only increased by 1%, below the market growth rate of 2.5% as the bank sought to safeguard margins. City analysts expect the bank’s earnings per share to fall 9% this year to 7.7p before ticking higher by 2% next year to 7.9%.

Income champion 

So overall, based on the current City forecasts it looks as if Lloyds is going to struggle to grow during the next few years. 

However, the shares seem like a great long-term income investment and in today’s low-interest rate environment, a yield of 7.1% for 2017 is extremely attractive, even more so when held in a tax-efficient ISA.

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Rupert Hargreaves 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.