Over five years, the share price of Lloyds Banking Group (LSE: LLOY) has fallen by 24%. Yet there’s much to like about the bank, from its dividend yield and potential for growth, to its sector-leading cost control and its evolving business model.
Opportunities for growth
One of the big attractions of the shares has to be the dividend yield, which has leapt to 5.6% since the bank reintroduced paying a dividend in 2014. Dividend growth has tended to be consistent and with earnings greater than the dividend payout, there’s room for it to keep on growing in the years to come.
Its move into wealth management in a link with Schroders is also a possible catalyst for the struggling share price. That business has only recently been launched so there’s plenty of opportunity for it to make an impact in future financial results, which could boost the share price.
Lloyds owns a majority of the venture and the pricing structure has been designed to undercut rivals – a sign that Lloyds and Schroders may be seeking to take a large market share. Other banks are also moving into the space, showing just how attractive and profitable wealth management is as a business.
What makes Lloyds great
From any investor’s point of view, a tight control on costs is a good thing. While HSBC and some other FTSE 100 businesses are often seen to be unwieldy, Lloyds, on the other hand, has a tight grip on its expense account.
The cost/income ratio, is under 46% (compared to nearly 48% previously), which is sector-beating and extremely healthy. By closing branches, as it has been doing for years, and becoming increasingly digital, Lloyds can move to reduce costs even further and reward shareholders with higher profits and potentially share buybacks or special dividends.
Factors outside of its control
The external environment also seems to be improving for Lloyds. For now, there’s a little more certainty around Brexit in the UK. And the deadline for PPI has now passed, meaning PPI provisions in future financial results should disappear.
The UK economy – which Lloyds is very much tied to – is doing better. Figures out just last week showed the dominant services sector of the economy grew, and by more than was expected. It reached its highest rate since September 2018.
Lloyds is looking in good shape, but the share price isn’t reflecting this. I think this is because of an ongoing fear about Lloyds’ reliance on the UK economy and the ongoing questions around Brexit. But the signs are that the economy is improving and analysts at Jefferies International think the shares can reach 78p – a near 37% increase from where they are now. As long as there are no nasty Brexit shocks, I think the Lloyds share price could smash the FTSE 100 this year because it has plenty going for it.
Andy Ross owns shares in HSBC. The Motley Fool UK has recommended HSBC Holdings and 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.