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Why I rate the Lloyds share price as perfect for my 2019 ISA

I just can’t see why Lloyds Banking Group (LSE: LLOY) isn’t the best bargain in the FTSE 100 right now.

I hold some in my SIPP, and though the share price has been disappointing over the past couple of years, I’ve enjoyed some healthy dividends — and I’m looking for a decade and more of steady, and rising, annual income.

That, in a nutshell, is my ISA strategy too. I largely ignore the share price as long as it’s not looking overvalued, and concentrate on the prospects for dividend yields over the long term.

Dividends

Right now, Lloyds dividends have recovered strongly from the financial meltdown and are forecast to yield 5.3% this year and 5.6% next. The payments would be more than twice covered by earnings too, which gives me confidence that they’ll be sustainable over the long term.

The fact that Lloyds shares are priced on a P/E multiple of under nine, well below the FTSE 100‘s long-term average, is something I see as an extra — and any share price appreciation over the next 10 years or so will be a bonus.

A low P/E can be a sign of caution too, as it can indicate a share price that’s low for a good reason. But with Lloyds, I really don’t see any need for such a bearish view based on the company itself. I can only see the share price weakness down to the malaise that’s still afflicting the financial sector, with fears greatly boosted by the uncertainty surrounding Brexit.

Cash

The bank is well capitalised, is growing profits, has strong cash flow, and its UK retail focus makes it, I think, the UK bank best insulated from the effects of Brexit.

My colleague Rupert Hargreaves has pointed to what I agree is Lloyds’ biggest risk right now, its exposure to the housing market. As the UK’s largest mortgage lender, there’s a fear that Lloyds could see bad debts rise should we face a falling housing market, and it could then have to make financial provisions for that.

But while the housing market is cooling, prices are holding up, and I see that as a good sign for the market in general as we’re in one of our toughest economic periods for some years. The housing market is also seriously, and chronically, undersupplied — and a serious shortage does ‘t usually presage a falling market.

Valuation?

What could Lloyds shares be worth in the long term? Even if the economic risk warrants a P/E below the Footsie’s long-term average of around 14, I can’t help seeing a multiple of about 12 being justified in the long term — especially if the bank’s healthy dividend yields don’t come under threat in the next couple of years.

That would suggest a share price of around 87p, a premium of a third over today’s price. But even without that, a 5.6% dividend yield on today’s price, reinvested in more Lloyds shares, would grow £1,000 invested today into £1,725 in 10 years on its own.

And that’s why, in addition to having some in my SIPP, I have Lloyds shares down on my 2019 ISA shortlist too.

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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.