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Here’s why my money is still on Lloyds Banking Group plc

A share on a forward P/E of only around nine, with big earnings growth forecast and prospective dividends of 6% and better on offer… well, that’s got to be a buy, hasn’t it?

The trouble is, I’ve been thinking that about Lloyds Banking Group (LSE: LLOY) for a frustratingly long time now. So have I got it completely wrong, or are there good short-term reasons why Lloyds shares are being held back?

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My colleague Rupert Hargreaves has been asking a very similar question, pointing out that over the past three years the share price has fallen by nearly 19%, even while profits have been rising and dividends have been hiked. He points to the government’s shareholding as a bit of a millstone, and I think he’s right.

Government fingers

Apart from the depressive effect of such a big seller gradually offloading shares on the market, investors are understandably twitchy when it comes to government interference in the free market. While I do support the bailing out of Lloyds and of fellow struggler Royal Bank of Scotland, governments of all flavours have pretty shabby records when it comes to running businesses directly. A quick exit is what we want.

The other big brake on progress is, of course, Brexit. But two things have happened recently to boost my confidence that things won’t go anywhere nearly as badly for the banking and financial sector as some are fearing.

While withdrawal from the EU could certainly harm our banks’ ability to deal with their European clients in the event of passporting rights being lost, they’re not so stupid as to just sit in their hands and wait for the inevitable. No, they’ll make provisions, and will move some of their operations to other EU countries.

New European home

Lloyds, according to the BBC this week, is eyeing up Berlin as the home for a new EU headquarters. It’s the only big UK bank that doesn’t yet have a European subsidiary, and its Berlin branch with 300 employees would seem ideal. A new German banking licence would be needed, but a number of European banking authorities have already said they’d welcome banks that want to move from London.

London as a banking centre might suffer some damage and there could be a lot of jobs lost, but the individual banks themselves can still thrive within Europe.

The other development is the announcement of a snap election, which I’m hoping will provide us with a more business-focused government that will prioritise getting the best deal possible for UK companies.

Still a buy for me

So, I’m still convinced that Lloyds shares are undervalued and that they will appreciate nicely over the next five to 10 years, even if, as often happens, short-term downturns can drag on for longer than we expect. We need patience and we should stick with our shares, unless the picture has changed significantly.

But it can take a specific trigger to start off an upwards re-rating of a depressed share, and the final termination of the government’s shareholding in Lloyds might be just what we need.

In the meantime, with pre-tax profit forecast to come in at just under £7.1bn this year, I’m happy to sit tight and keep taking the cash — especially with dividend yields predicted to rise to 6.6% by 2018.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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