The Motley Fool

3 reasons why the Lloyds share price could have further to go

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young woman sat at laptop by a window
Image source: Getty Images.

Lloyds Banking Group’s (LSE: LLOY) latest results show the business is making substantial progress in its efforts to turn itself around. While statutory pre-tax profits missed analysts’ forecasts amid a further increase in its PPI provisions, Britain’s biggest mortgage lender was optimistic about its underlying financial performance.

It has remade itself into a very profitable bank with metrics that the other big four banks could only dream about. And although its shares have recovered strongly post-Brexit, there are a number of bullish catalysts ahead that could lead to further gains in its share price.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Rising interest rates

First, the outlook for rising interest rates bodes well for future earnings, as it is expected to improve the profit spread between the interest income it generate and what it has to pay out to lenders, ie those of us who deposit our money there. That’s its net interest margin.

The bank seems to be already benefitting from the Bank of England’s decision to increase its base rate by 25 basis points, as net interest margins in 2017 widened to 2.86%, from 2.71% in the previous year. Looking ahead, Lloyds reckons its net interest margin could rise still further, giving guidance of around 2.9% in 2018.

As well as growing its interest income, Lloyds has ambitious plans to expand its financial planning and retirement propositions. It has set itself a target to grow its open book assets by more than £50bn by 2020 with more than one million new pension customers.

PPI deadline

Also, not long from now, payment protection insurance (PPI) claims should start to fall as the August 2019 deadline to claim compensation approaches. This would end a major drag on its earnings, which has so far cost the bank more than £18bn in profits since the financial crisis.

If we set aside these PPI provisions, along with other non-recurring costs which included its restructuring and other legacy misconduct charges, Lloyds would have earned a return on tangible equity (RoE) of 15.6%. Instead, its statutory RoE was just 8.9% in 2017 — though that still exceeded most of its major competitors and was an improvement from the 6.6% figure from the previous year.

Growing shareholder payouts

An outlook for improving returns brings me to my third reason — growing shareholder payouts. Lloyds’ dividend was suspended during the last financial crisis, but the stock is rapidly becoming one of the FTSE 100’s top dividend stocks.

Since the bank returned to dividend payments in 2014, it has delivered impressive growth in annual dividends year after year, supported by strong capital generation and its robust balance sheet. Most recently, it announced a 20% increase in its 2017 payout, with full-year ordinary dividends totalling 3.05p per share.

And it’s not just through dividends that the bank is returning cash to shareholders. This week, management also announced a share buyback of up to £1bn, which would bring total capital returns from the bank to around 46% for 2017.

Looking ahead, I expect capital returns to rise to more than a majority of its capital generation as returns continue to improve. City analysts seem to agree, with a consensus dividend forecast of 4.4p in 2018 giving it a prospective dividend yield of 6.5%.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Jack Tang has a position in Lloyds Banking Group plc. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.