Why I want to buy Lloyds Banking Group plc and Barratt Developments plc

Today I’ll be discussing the outlook for FTSE 100 housebuilder Barratt Developments (LSE: BDEV) and high street lender Lloyds Banking Group (LSE: LLOY), and reveal why I think these companies offer great investment potential.

Continued growth

FTSE 100 housebuilder Barratt Developments updated us with a positive trading statement recently saying that market conditions had remained strong with good levels of demand for new homes. The Leicestershire-based company revealed that 51 new developments had been launched since the start of 2016, and said it expects to approve between 21,000 and 23,000 plots in the current financial year to the end of June. The company also retained its Home Builders Federation (HBF) five star customer satisfaction rating for the seventh consecutive year.

Barratt’s shares have performed exceptionally well in recent years climbing steadily since 2008 to reach highs of 662p last September, but have pulled-back in recent months to around 580p, which in my opinion presents investors with the perfect buying opportunity. Earnings have improved year-on-year since 2010 and this is expected to continuewith consensus forecasts suggesting a healthy 20% increase in underlying profits for the current year and a further improvement of 11% pencilled-in for fiscal 2017.

Despite the strong forecasts, Barratt’s shares trade on a modest price-to-earnings (P/E) ratio of 10.7 for the current year, falling to just 9.6 in 2017, and support chunky dividend yields of 5% and 6.1% for this year and next. The healthy growth forecasts, modest P/E rating, and chunky dividend yields make Barratt very appealing for investors seeking both capital growth and strong income.

Government sell-off

The government last week announced its plans to sell its remaining 9.2% stake in Lloyds Banking Group in a move that will see the bank fully returned to the private sector. During the financial crisis the taxpayer coughed-up around £20.5bn to acquire a 43% stake in Lloyds to save the bank from total collapse, with the forthcoming share sale hopefully drawing a line under the whole sorry saga.

Lloyds’ shares have continued to underperform this year losing a fifth of their value since last May, and look to be trading at bargain basement prices. Our friends in the City expect earnings to shrink by 11% to £5.4bn this year, recovering slightly to £5.5bn next year. However, I think the shares looks good value at the moment trading on a forward P/E ratio of just nine for this year and next.

Furthermore, the market is expecting a significant increase in dividend payouts this year, leaving the shares supporting hefty dividend yields of 6.2% and 7.2% for this year and next. For me, Lloyds looks to have significant upside potential given the ultra-low P/E rating, while I believe the dividend hike could bring back income-seekers and help support the share price over the longer term.

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Bilaal Mohamed 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.