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Why I’d stop worrying about the State Pension and buy the rising Lloyds share price instead

At last, good things are happening to the Lloyds Banking Group (LSE: LLOY) share price. The FTSE 100 banking giant’s shares have now risen by almost a quarter in the last three months, and it could have further to go.

On the up

I’m really pleased to see Lloyds starting to pick up because I’ve been tipping it to do the business for over a year. I couldn’t work out why investors were failing to share in my excitement, so it’s great to see markets belatedly come round to my way of thinking.

I’m not alone in spotting an opportunity in what is the UK’s most traded stock. Last month, my Foolish colleague Rupert Hargreaves declared that he thought the Lloyds share price was the most undervalued in the FTSE 100.

Money everywhere

We were thinking along the same lines, as Rupert hailed the stock as a household name with growing profits and a strong balance sheet that’s throwing off cash. In 2018, it posted a 24% rise in statutory profits after tax to £4.4bn, up 6% on an underlying basis to £8.1bn. Think about it – more than £8bn. That’s a lot of money. More than enough to fund the group’s current share buy-back programme which will see it repurchase up to £1.75bn of ordinary shares.

It can also fund a generous dividend, with 2018’s payout up 5% to 3.21p a share. Combined, the total shareholder return for 2018 will be £4bn, a 26% rise. Who wouldn’t want to share in that annual jackpot?

The forecast dividend yield is now 5.6%, with solid cover of 2.2. City analysts reckon the yield could hit 5.9% in 2020. Pop Lloyds into a tax-free Stocks and Shares ISA and you have a great way of boosting your long-term retirement income.

Risk and reward

Some investors will worry about the banking sector as the global economy potentially faces recession, but Lloyds has spent a decade (prodded by the regulators) building up its safety barriers. Management recently reported that credit quality remains strong with no deterioration in risk, while the balance sheet looks strong with a common equity tier 1 ratio of 13.9%, up 210 basis points in the year. And that’s after funding all those juicy dividends and share buybacks.

Investors have understandably been wary about the banks since the financial crisis but now it looks like Lloyds may finally be approaching escape velocity, and could really zoom off. As Rupert noted, there’s a real opportunity here with this Lloyd’s share price at its lowest in 10 years. That’s fading, thanks to its strong performance year-to-date.

As ever, there are risks. Brexit is still staring the bank right in the face. This isn’t a global bank, but one very much focused on the UK, and could struggle if we get a no-deal that turns out to be a disaster.

A more satisfactory conclusion, though, could see the share price surge higher. Everything is hanging in the balance on that front, but I reckon that as long as we can avoid total meltdown, the long-term outlook for Lloyds is bright.

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Harvey Jones has no position in any of the shares mentioned. 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.